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^E 


PROBLEMS  OF  WAR  AND  OF  RECONSTRUCTION 


EDITED  BY 

FRANCIS  G.  WICKWARE 


WAR  COSTS  AND 
THEIR   FINANCING 


PROBLEMS  OF  WAR 
AND  OF  RECONSTRUCTION 

Edilid  by 

Francis  G.  Wickware 

The  Redemption  of  the  Disabled 

By  Garrard  Harris.  Resiarch  Division,  Federal  Board  (or 
Vocational  Education. 

The  Colleges  in  War  Time  and  After 

By  Parke  Rexford  Kolbe,  President  of  the  Municipal  Uni- 
versity of  Akron,  Special  Collaborator  in  the  United  States 
Bureau  of  Education. 

The  American  Air  Service 

By  Arthur  Sweetser,  Sometime  Captain,  Air  Service,  United 
States  Army. 

Commercial  Policy  in  War  Time  and  After 

By  William  Smith  Culbertson,  Member  of  the  United  States 
Tariff  Commission. 

Government  Organization  in  War  Time  and  After 

By  William  Franklin  Willooghby,  Director  of  the  Institute  for 
Government  Research. 

The  Strategy  of  Minerals 

Edited  by  George  Otis  Smith,  Director  of  the  United  States 
Geological  Purvey. 

War  Costs  and  Their  Financing 

By  F.rnest  L.  Bogart,  Professor  of  Economics  in  the  University 
of  Illinois. 


D.   APPLETON   AND  COMPANtY 

PUBLISHERS  NEW  YORK 


T225C 


PROBLEMS  OF  WAR  AND  OF  RECONSTRUCTION 

WAR  COSTS  AND 
THEIR  FINANCING 

A  STUDY  OF  THE  FINANCING  OF  THE  WAR  AND  THE 
AFTER-WAR    PROBLEMS    OF    DEBT    AND    TAXATION 


BY 

ERNEST  LUDLOW  BOGART 

PROFESSOR  OF  ECONOMICS  IN  THE  UNIVERSITY  OF 
ILLINOIS;  SOMETIME  ASSISTANT  FOREIGN  TRADE  ADVISER 
IN       THE       UNITED       STATES       DEPARTMENT       OF       STATE 


WITH  AN  INTRODUCTION  BY 

RUSSELL  C.  LEFFINGWELL 

SOMETIME    ASSISTANT   SECRETARY   OF  THE   TREASURY 


D.  APPLETON  AND  COMPANY 

NEW  YORK  LONDON 

1921 


COPTHIGIIT,    1921,    BY 

D.  APPLETON  AND  COMPANY 


PRINTED   IN   TIIK   TNITED   STATES  OF  AMERICA 


3Ww 


TO 

MY  ASSOCIATES 
ON  THE 

WAR  TRADE  BOARD 
^  AND  IN  THE 

"^  DEPARTMENT  OF  STATE 


V 


211255 


PREFACE 

The  effort  has  been  made  in  this  volume  to  present  in 
broad  outline  the  salient  features  of  war  finance  and 
some  of  the  financial  problems  now  confronting  the 
United  States  and  the  leading  nations  of  Europe. 
Although  it  is  still  too  early  to  assess  accurately  the 
relative  importance  of  various  economic  and  financial 
measures  and  events,  there  is  a  certain  gain  in  recording 
them  while  they  are  still  fresh  in  mind.  Many  events 
were  so  extraordinary,  and  the  measures  taken  to  cope 
with  them  so  unprecedented,  that  much  time  and  study 
will  be  required  finally  to  determine  their  part  in  the 
"World  War.  But  that  they  played  an  important  role  in 
determining  the  outcome  of  the  struggle  is  clear.  The 
"silver  bullets"  were  equally  decisive  with  those  of  lead 
or  steel  in  deciding  the  victory.  Never  before  were  the 
differences  between  a  good  and  a  vicious  theory  of  war 
finance  so  important  and  so  far-reaching,  for  never 
before  have  war  expenditures  reached  such  stupendous 
figures. 

It  had  been  hoped  that  the  wide  ramifications  of  inter- 
national credit  and  trade  would  constitute  an  effectual 
guarantee  against  war,  but  this  hope  was  rudely  dashed. 
Again,  when  war  actually  began,  it  was  confidently  pre- 
dicted that  the  financial  exhaustion  of  the  belligerents 
would  bring  it  to  an  end  after  a  few  months,  but  events 
proved  these  prophecies  also  false.  A  constantly  recur- 
rent problem  throughout  the  whole  war  was  the  question 
as  to  whence  came  the  enormous  sums  which  were 
expended  with  such  reckless  prodigality.  The  important 
part  played  by  the  banks  in  financing  the  war,  the  enor- 
mous loans  made  by  all  the  belligerents,  the  unprece- 

vii 


PREFACE 

dented  inflation  as  a  result  of  the  increase  in  note  issues 
and  the  subtler  credit  expansion,  and  the  more  limited 
resort  to  taxation,  all  presented  problems  of  paramount 
'interest  and  importance.  These  are  discussed  in  the 
following  pages. 

For  us  the  most  significant  result  of  the  war  is  the 
emergence  of  the  United  States  as  a  creditor  nation  and 
its  present  dominating  position  in  foreign  trade  and 
international  finance.  The  changes  in  the  movements  of 
foreign  trade,  and  in  the  commercial,  industrial,  and 
financial  life  of  the  United  States,  are  briefly  described. 
The  final  chapters  of  the  book  present  the  problems  of 
financial  reconstruction  —  problems  of  inflated  currency, 
of  staggering  debts,  of  cru:;hing  taxation  —  and  of  the 
measures  taken  by  the  leading  belligerents  to  meet  these 
problems.  In  conclusion,  the  cost  of  the  war,  so  far  as 
this  is  reducible  to  money  values,  is  stated. 

With  regard  to  the  statistics  of  war  finance  a  word  of 
explanation  is  needed.  For  convenience  foreign  cur- 
rencies have  been  converted  into  dollars  at  pre-war  rates 
of  exchange,  but  in  round  numbers  rather  than  in  precise 
equivalents.  Thus,  the  pound  sterling  ($4.8665)  has 
been  converted  at  $5;  the  ruble  ($0.5146)  and  yen 
($0.4985),  at  50  cents;  the  florin  ($0,402),  at  40  cents; 
the  krona  ($0,268)  and  mark  ($0.2385),  at  25  cents;  the 
krone  ($0.2022),  the  leu  and  leva  ($0.1946),  the 
drachma,  lira,  and  franc  ($0,193),  at  20  cents.  This  has 
resulted  in  a  slight  overstatement  in  the  case  of  some  of 
the  countries  and  a  slighter  understatement  in  the  case 
of  others,  but  as  many  of  the  figures  are  themselves  still 
open  to  correction,  it  was  thought  that  the  convenience 
of  this  method  more  than  offset  the  slight  variations 
involved. 

In  w^riting  this  book  the  author  drew  upon  material 
used  in  the  preparation  of  a  companion  statistical  study, 
"The  Direct  and  Indirect  Costs  of  the  Great  World 

viii 


PKEFACE 

War"  J  most  of  the  tables  and  other  statistical  data  incor- 
porated in  Chapters  IV,  V,  VI,  and  VIII  of  this  volume 
have  been  drawn  from  that  source.  To  the  Carnegie 
Endowment  of  International  Peace,  by  whom  this  study 
was  published,  the  author  begs  to  make  acknowledgment 
for  their  kindness  in  permitting  the  use  of  this  copy- 
righted material.  In  other  respects  the  present  volume 
is  an  independent  study. 

Friendly  counsel  and  assistance  have  been  received  by 
the  author  from  many  quarters,  but  his  obligations  are 
so  manifest  in  certain  instances  that  he  desires  to  make 
public  acknowledgment  thereof.  To  Miss  Constance 
Agnes  McHugh  his  indebtedness  is  especially  great  for 
her  untiring  and  capable  assistance  in  collecting  and 
assembling  the  material,  in  preparing  most  of  the  tables, 
and  in  giving  information  and  advice  upon  many  points. 
Sincere  thanks  are  also  tendered  Dr.  Constantine  E. 
McGuire  for  the  onerous  task  of  reading  the  manuscript 
and  for  many  valuable  suggestions.  For  errors  which 
yet  remain  and  for  the  views  herein  expressed  on  dis- 
putable points,  the  author  alone  must  be  held  responsible. 

Ernest  L.  Bogart. 


CONTENTS 

PAGE 

PREFACE vii 

INTRODUCTION .      XV 

CHAPTER  I 

THE  BASIS  OF  NATIONAL  AND  INTERNATIONAL   CREDIT 

Industrial  development  furnishes  a  supply  of  capital  —  De- 
velopment of  credit  and  financial  institutions  jjrovide  a 
money  market  —  Political  democracy  creates  a  ■willingness 
to  lend  —  The  growth  of  public  debts  —  Opportunity  for 
profit  in  the  exploitation  of  undeveloped  countries  — 
Investments  in  foreign  countries  —  London  an  interna- 
tional money  market  and  center  of  credit  ...       1 

CHAPTER  II 

FINANCIAL  READJUSTMENTS  AT  THE  OUTBREAK  OF  "WAR 

Germany 's  preparedness  —  The  Entente  Allies  caught  un- 
aware —  Panic  and  temporary  breakdown  of  credit  — 
Remedial  measures  —  Safeguarding  the  gold  reserves  — 
Issue  of  additional  money  —  Adjustment  to  war  con- 
ditions          21 

CHAPTER  III 

THE  UNITED  STATES  AS  A  NEUTRAL 

Situation  in  the  United  States  at  the  outbreak  of  the  war  in 
Europe  —  The  expansion  of  foreign  trade  —  How  Europe 
paid  its  bills  —  The  shipment  of  gold  —  Foreign  loans 
placed  in  the  United  States  —  Purchase  of  American 
securities  held  abroad  —  Is  New  York  to  be  the  financial 
center  of  the  world?  •  ....     54 

CHAPTER  IV 

WAR  EXPENDITURES 

The  cost  of  past  wars  —  Expenditures  in  the  United  States  — 
Expenditures  in  Great  Britain  —  Expenditures  in  France, 
Russia,  and  Italy  —  Expenditures  in  Germany  and 
Austria-Hungary  —  Comparative  estimate  of  total  war 
expenditures 82 

xi 


\ 


CONTENTS 
CHAPTER  V 

PAPER  MONEY  AND  BANK  CREDIT 

Large  use  of  banks  in  financing  the  war  —  Direct  issues  of 
paper  money  in  Europe  —  Services  of  the  Federal  Eeserve 
System  in  the  United  States  —  Treatment  of  gold      .  107 

CHAPTER  VI 

LOANS  IN  EUROPE 

General  characteristics  —  British  war  loans  —  Use  of  loans  in 
France,  Eussia,  and  Italy  —  The  German  theory  of  war 
finance  —  German  banks  and  loan  bureaus  —  Loans  in 
Austria-Hungary,  Bulgaria,  and  Turkey    ....  146 

CHAPTER  VII 

LOANS  IN  THE  UNITED  STATES 

War-finance  program  of  the  United  States  —  The  First  Lib- 
erty Loan  —  The  Second  Liberty  Loan  —  The  Third  Lib- 
erty Loan  —  The  Fourth  Liberty  Loan  —  The  Victory 
Liberty  Loan  —  War  savings  and  thrift  stamps  —  Ad- 
vances to  the  Allies 199 


CHAPTER  VIII 

TAXATION  IN  EUROPE 

Vigorous  use  of  taxation  in  England  —  Slight  results  in 
France,  Eussia,  and  Italy  —  Eeasons  therefor  —  In- 
adequacy of  ta^xation  by  the  Central  Powers      .         .         .  234 

CHAPTER  IX 

TAXATION    IN   THE   UNITED    STATES 

A  new  era  of  Federal  taxation  —  Revenue  Act  of  October  3, 
]913  —  Outbreak  of  the  European  War —  Emergency 
Eevenue  Act  of  October  22,  1914  —  Act  of  September  8, 
1916  — The  taxation  of  wealth  — Act  of  March  3,  1917  — 
Declaration  of  war  by  the  United  States  —  War  Eevenue 
Act  of  October  3,  1917  —  Income  and  excess-profits  tax 
provisions  —  Act  of  February  24,  1919  —  Analysis  of  the 
measure 264 

xii 


CONTENTS 
CHAPTER  X 

HOW  SHOULD  A  WAR  BE  FINANCED?      THE  LESSON  OP  THE  CIVII. 

WAR 

The  problem  of  financing  the  Civil  War  —  Chase 's  loan 
policy  —  Inadequacy  of  taxation  —  Issue  of  legal-tender 
notes  —  System  of  short  term  loans  —  Bond  acts  —  Con- 
clusions—  Financial  management  of  the  World  AVar  — 
Inability  to  meet  current  charges  —  Loans  vs.  taxe^  — 
Arguments  for  a  loan  policy  —  Disadvantages  of  heavy 
taxation  —  Arguments  for  a  tax  policy  —  Evils  of  exces- 
sive loans 297 

CHAPTER  XI 

FINANCING  EUROPE   AFTER  THE   WAR 

Foreign  trade  of  the  United  States  as  a  belligerent  —  Exports 
and  imports  by  regions  —  The  balance  of  trade  — 
Europe 's  need  for  capital  —  Greatest  supplies  to  be 
found  in  the  United  States  —  How  can  this  be  made 
available?  —  Machinery  by  which  loans  can  be  advanced 
to  Europe  —  Proposals  for  the  extension  of  short-time 
credit  —  Long-term  credit  —  Conclusions  .         .         .  326 

CHAPTER  XII 

AFTER-WAR  PROBLEMS  OF  CURRENCY  AND  DEBT 

Inflation  of  the  currency  a  world  phenomenon  —  Its  effect  on  y 
prices  —  Why  should  inflation  have  been  permitted?  — 
The  remedy  for  inflation  —  Difficulties  —  The  distribution 
of  gold  —  Financial  situation  of  the  principal  countries  — 
Comparison  of  wealth  and  debt  —  Can  th?  burdens  be  car- 
ried?—  American  and  European  theories  as  to  debt  pay- 
ment —  Problem  of  funding  ihe  floating  debts  —  Thg 
capital  levy  —  Problem  of  refunding  —  Will  the  debts 
be  paid? 351 

CHAPTER  XIII 

AFTER-WAR  PROBLEMS  OP  TAXATION 

Economic    strength    of    the    leading    nations  —  The    financial        -^ 
outlook   in  the  United   States  —  The   situation   in   Great 
Britain  —  The  situation  in  France  and  Italy  —  Germany 's 
position  —  Proposed   revenues   of  five  leading  nations  — 
Probable  development  of  principal  taxes  .         .         .  391 

xiii 


CONTENTS 


CHAPTER  XIV 

THE  COST  OF  THE  WAR 

Who  pays  for  a  war?  —  Material  costs  —  Depletion  of  capi- 
tal —  The  burden  on  future  generations  —  Direct  and 
indirect  costs  —  Immaterial  costs  —  Diversity  of  losses  — 
Some  factors  of  advantage  —  Indefensibility  of  war        .  413 


APPENDICES 

I.  British  Moratorium  Proclamations 

II.  French  Moratorium  Decrees 

III.  Act  Providing  for  German  Loan  Offices 

IV.  Liberty  Bond  Acts 

v.  Taxation  in  the  United  States 

VI.  Public  Debt  of  the  United  States     . 


423 
429 
432 
437 
473 
489 

493 


INTRODUCTION 

One  who  attempts,  so  soon  after  the  fact,  to  make  a 
comprehensive  survey  of  the  financing  of  the  World  War 
by  all  the  belligerents  performs  an  important  service, 
for  he  sets  men's  minds  thinking  about  the  war's  lessons 
in  finance  and  economics  while  they  still  have  current 
interest.  He  necessarily  labors,  however,  under  great 
handicaps.  Authoritative  histories  of  the  financing  of 
the  war  in  each  of  the  countries  involved  remain  to  be 
written.  Generally  the  policies  adopted  and  the  results 
are  matters  of  record,  but  the  reasons  for  their  adoption 
remain  to  some  extent  to  be  disclosed.  In  the  present 
volume  Professor  Bogart  has  performed  a  valuable 
service  in  bringing  together  in  usable  form  some  of  the 
scattered  data  relating  to  war  finance  and  in  drawing 
such  conclusions  as  seemed  to  him  warranted  by  the  evi- 
dence in  hand.  In  the  performance  of  this  task  he  has 
displayed  industry,  discrimination,  and  breadth  of  view. 

On  the  continent  of  Europe  generally,  currency  infla- 
tion moved  hand  in  hand  with  the  war  itself,  and  the 
demands  of  Governments  for  the  destructive  business  of 
war  served  to  inflate  prices.  The  peoples  of  the  Con- 
tinental countries  had  been  staggering  for  generations 
under  the  burdens  of  an  armed  peace.  They  were  perhaps 
in  no  condition,  certainly  in  no  mood,  to  submit  to  addi- 
tional taxation  when  called  upon  to  engage  in  actual  war. 
The  price  of  physical  preparedness,  long  maintained, 
was,  for  them,  economic  and  financial  unreadiness  for  a 
long  war.  The  inflation  stimulant  was  deemed  necessary 
by  their  statesmen,  and  it  was  injected  unsparingly  and 
continuously.  On  the  other  hand,  thanks  to  relative 
immunity   from    land    attack,    Great   Britain    and    the 

XV 


INTRODUCTION 

United  States,  though  they  had  maintained  great  navies, 
had  escaped  the  greater  economic  drain  of  standing 
armies,  and  entered  the  war  with  resources  relatively 
unimpaired.  So  in  Great  Britain  currency  inflation  was 
strictly  limited,  and  in  the  United  States  it  was  wholly 
avoided,  as  an  instrument  of  war  finance,  and  in  these 
countries  a  vigorous  effort  was  made  to  limit  inflation  of 
credit,  a  grave,  though  lesser,  evil.  Germany  seems  to 
have  been  enabled  to  conceal  the  effects  of  her  inflation 
policy  from  her  own  people,  almost  to  the  end  of  the  war, 
by  the  Allied  blockade,  which  prevented  the  German 
people  from  making  purchases  abroad,  and  thus  pre- 
vented the  depreciation  of  the  mark  from  being  fully 
registered  in  foreign  exchange,  while  price-fixing  and 
rationing  had  a  similar  effect  at  home.  It  is  an  interest- 
ing speculation  whether  the  blockade  of  Germany,  which 
enforced  "war  saving"  on  the  German  people,  was  more 
of  a  benefit  than  a  detriment  to  Germany,  whether  her 
economic  collapse  was  expedited  or  delaj-ed  by  it. 

On  the  European  continent  then,  inflation  was  accel- 
erated by  unsound  fiscal  expedients,  whereas  in  England 
and  the  United  States  it  was  retarded  by  relatively  sound 
ones.  But  the  disease  spread  by  railroad  and  ship,  by 
cable  and  wireless,  to  the  uttermost  parts  of  the  earth, 
whithersoever  war  orders  could  be  transmitted  and  gold 
or  securities  shipped,  or  credits  established  under  the 
inducement  of  war  profits.  Its  ravages  seem  to  have 
been  most  severe  in  Japan,  India,  and  other  remote 
places,  which  assumed  little,  if  any,  of  the  war's  financial 
burdens  and  enjoyed  to  the  utmost  its  apparent  benefits; 
just  as  in  this  country  price  inflation  was  more  rapid 
before  we  entered  the  war  and  after  the  armistice  than 
during  the  intervening  period  when  we  were  engaged  in 
actual  warfare  and  war  laws  and  regulations  and  the 
war  spirit  made  it  possible  to  impose  a  certain  restraint. 

Certainly  inflation  could  not  have  been  avoided  alto- 
xvi 


INTRODUCTION 

gether  unless  the  war  itself  had  been  avoided,  for  it  had 
its  source  in  the  war's  waste  of  wealth.  When  the  war 
ended,  though  the  belligerent  Governments  had  on  hand 
considerable  stocks  of  war  supplies,  ill  adapted  or  not 
adapted  at  all  for  civilian  use,  and  though  there  had  been 
enormous  increases  in  plant  intended  for  making  tools 
of  war,  stocks  of  goods  for  civilian  use  were  very  low, 
and  the  normal  programme  for  the  maintenance  and 
extension  of  civilian  plant  and  equipment,  including 
railroads  and  housing,  had  been  practically  in  abeyance 
for  the  whole  war  period.  The  world's  working  capital 
and  its  fixed  capital  had  been  reduced.  The  world  had 
been  living  beyond  its  income,  living  to  some  extent  upon 
its  accumulation  of  wealth.  This  would  have  meant  in- 
flation even  if  the  whole  cost  of  the  war  had  been  met 
from  current  taxes,  for  the  money  to  pay  taxes  could 
only  have  been  had  by  expanding  credit  to  the  extent  that 
war  expenditures  exceeded  the  nat  income  of  the  people. 
If  it  were  possible,  every  expenditure  of  government 
in  war  and  in  peace  should  be  met  from  current  taxes. 
The  notion  that  by  borrowing  the  burden  may  be  passed 
on  to  future  generations  is  a  delusion  and  a  snare.  It  is 
true  that  by  long  borrowings  future  generations  are 
burdened.  The  present  cannot,  however,  escape  the 
burden.  Government  expenditures  for  economically 
wasteful  purposes  create  it.  Government  loans  diffuse 
it,  by  absorbing  capital  and  inflating  credit,  hy  increas- 
ing prices  and  interest  rates.  Thus  the  burden  is  shifted, 
not  from  one  generation  to  another,  but  from  the  tax- 
payer to  the  community  as  a  whole.  Government  debt  is 
always  bad.  When  created  for  the  purposes  of  war,  it 
should  be  paid  off  as  promptly  as  possible  after  peace. 
Burdensome  as  taxes  may  be,  their  burden  is  lighter 
while  war  inflation  lasts.  Taxation  for  redemption  of 
home  debt  is  never  really  burdensome  except  as  it  is 
inequitably  imposed. 

xvij 


INTRODUCTION 

But  taxes  should  be  paid  from  income.  They  cannot 
be  paid  without  inflation  from  any  other  source.  They 
should  accordingly  be  imposed  upon  and  assessed  in  pro- 
portion to  income.  If  it  were  possible,  they  should  be 
imposed  upon  availaUe  incomes,  that  is,  upon  the  part  of 
the  income  of  the  taxpayer  not  required  with  reasonable 
economy  to  support  himself  and  his  familj^,  or  of  the 
business  man  for  the  development  of  his  business.  But 
it  is  impracticable  in  tax  law  and  administration  to  make 
these  nice  discriminations,  and  exemptions  below  a  fixed 
minimum  income  and  graduated  surtaxes  upon  super- 
" normal"  incomes  are  but  a  crude  effort  in  that  direc- 
tion. "When  the  tax  gatherer  takes  more  than  the 
available  income  of  a  given  taxpayer,  the  excess  becomes 
in  effect  a  capital  tax  and  must  be  borrowed  or  provided 
by  the  sale  of  capital  assets.  If  the  taxpaj^er  happens  not 
to  have  available  property  to  an  amount  sufficient  to  pay 
his  taxes  and  provide  for  the  expansion  of  his  business, 
his  activities  will  be  curtailed  or  put  an  end  to. 

The  difficulties  and  injustices  involved  in  any  system 
of  taxation  become  more  serious  as  tax  rates  increase ; 
and  when,  as  in  the  World  War,  the  Government's  needs 
exceed  the  whole  free  income  of  the  people,  after  pro- 
viding for  operating  and  living  expenses  and  the  capital 
expenditures  that  are  necessary  to  enable  business  to 
meet  the  demands  for  munitions  and  supplies  thrown 
upon  it  by  the  war,  then  it  is  impossible  to  adopt  any 
system  of  taxation  that  will  fully  meet  the  Government's 
needs  and  at  the  same  time  avoid  inflation.  In  a  war 
the  Government  should  levy  taxes  to  as  great  an  amount 
as  it  can  without  jeopardizing  the  productive  business  of 
the  country,  which  is  as  essential  to  the  successful  con- 
duct of  the  war  as  fighting  men  themselves. 

For  instance,  if  instead  of  asking  $8,000,000,000  taxes 
for  the  fiscal  year  1919,  the  Treasury  of  the  United 
States  had  in  June,  1918,  asked  $24,000,000,000,  which 

xviii 


INTRODUCTION 

was  the  estimated  amount  of  expenditures  on  a  war*^ 
basis,  and  if  Congress  had  withstood  the  outcry  and 
passed  such  a  tax  law,  it  is  not  difficult  to  guess  that  the 
consequence  would  have  been  a  business  catastrophe  in 
this  country  which  would  have  put  us  effectively  out  of 
the  war.  We  should  not  have  been  able  to  spend  the 
$24,000,000,000,  because  we  should  not  have  been  able  to 
find  solvent  business  concerns  to  execute  the  Govern- 
ment's orders.  Whether  it  would  have  been  safe  to  go 
somewhat  further  than  $8,000,000,000,  it  is,  of  course, 
impossible  to  say.  One  thing  is  clear,  that  if  excessive 
taxes  were  imposed,  the  fact  might  not  be  known  until 
efficiency  was  impaired  and  the  harm  done.  In  war 
time  it  would  be  impossible  to  repair  the  injury  done  by 
a  tax  levy  which  in  fact  was  excessive.  Panic,  depres- 
sion, lowered  efficiency,  inactivity,  will  take  place  sooner 
or  later  as  the  result  of  a  really  serious  error  on  the  side 
of  severity  in  taxation.  If  they  take  place  in  war  time, 
the  consequences  may  be  irreparable.  The  consequences 
of  moderate  errors  on  the  side  of  leniency  in  taxation, 
however,  though  very  grave,  are  not  irreparable.  After 
a  war  is  won,  the  people  can,  if  they  will,  submit  to 
taxation  to  an  amount  adequate  to  repair  the  error. 

The  question  is,  however,  largely  academic.  One 
hundred  million  people  are  not  pawns  in  a  game.  They 
will  have  no  better  government  and  no  better  economics 
than  they  want,  and  even  if  they  wanted  and  got  the  best, 
they  could  not  escape  the  evil  consequences  of  bad  gov- 
ernment and  bad  economics  rampant  in  the  rest  of  the 
world.  To  illustrate  again.  Our  Treasury's  programme 
was  to  finance  from  current  taxes  at  least  one-third  of 
our  total  expenditures,  including  loans  to  foreign  Gov- 
ernments. The  first  War  Revenue  Act  was  supposed  to 
carry  $4,000,000,000  in  taxes.  It  did  not,  however, 
become  law  until  October  3,  1917,  about  six  months  after 
the  declaration  of  war.     A  little  more  than  six  months 

xix 


INTRODUCTION 

later  the  Treasury  demanded  that  the  tax  revenues  be 
doubled,  so  as  to  produce  $8,000,000,000.  The  leaders 
of  both  parties  in  Congress  had  agreed  among  themselves 
to  adjourn  in  July,  1918,  to  enable  members  of  Congress 
to  mend  their  fences  before  election,  and  they  protested 
vigorously  against  the  Treasury's  programme.  Congres- 
sional leaders  in  the  Administration  party  assured  the 
Secretary  of  the  Treasury,  and  the  President  himself,  to 
whom  they  appealed,  that  persistence  in  the  Treasury's 
programme  would  inevitably  mean  loss  of  the  House  of 
Representatives  to  the  Administration  party  at  the  elec- 
tion in  the  following  November.  The  Treasury  never- 
theless did  persist,  the  President  sustained  it,  and  the 
Administration  lost  not  only  the  House,  but  the  Senate 
as  well.  The  $8,000,000,000  tax  bill  passed  the  House 
after  a  protracted  delay,  but  the  Senate  did  not  act  upon 
it  until  after  the  election  and  the  armistice  in  Novem- 
ber, 1918,  when,  in  the  light  of  altered  conditions,  the 
Treasury  modified  its  programme  and  asked  for 
$6,000,000,000,  mstead  of  $8,000,000,000.  The  second 
War  Revenue  Act  did  not  become  law  until  February  24, 
1919,  more  than  three  months  after  the  fighting  stopped 
and  about  nine  months  after  the  Treasury  had  demanded 
the  additional  revenue.  The  Secretary  of  the  Treasury 
and  the  President  knowingly  took  their  political  lives  in 
their  hands  in  an  effort  to  finance  the  war  as  largely 
as  possible  from  current  taxes,  and  in  the  issue  lost  them. 
It  is  inevitable,  then,  that  the  amounts  collected  in 
taxes  fall  far  short  of  Governments'  needs  in  such  a  war. 
The  difference  must  be  made  up  by  loans.  Those  loans 
should  be  distributed  as  widely  as  possible  among  in- 
vestors. To  the  extent  that  Government  expenditures 
are  met  from  loans  placed  among  investors,  who  pay  for 
them  out  of  income  which  would  otherwase  have  been 
spent  or  invested  in  non-essential  enterprises,  inflation 
may  be  avoided  for  the  time  being.    It  was  the  multitude 

XX 


INTRODUCTION 

who  financed  the  war.  Whether  with  their  savings  the 
rich  bought  Government  securities,  was  not  very  im- 
portant. To  the  extent  that  the  rich  do  not  own  Govern- 
ment securities  they  invest  in  other  securities.  It  was 
onl}^  the  multitude  who  had  a  capacity  of  saving  and 
making  investments  which  they  had  never  utilized. 

There  are  those  who  say  that  Governments  should  have 
paid  the  market  rate  for  money  throughout  the  war.  The 
fact  is  that  there  was  no  market  rate  and  there  could  be 
none.  The  supply  of  Government  securities  always 
exceeded  the  demand.  Funds  to  meet  this  necessity 
could  be  had,  not  by  marking  down  values  of  existing 
securities,  but  by  seeking  new  savings,  and  these  in  turn 
were  to  be  had  by  appeals,  not  to  acquisitiveness,  but  to 
patriotism.  The  overwhelming  necessities  of  the  war 
dominated  the  situation;  demand  was  unlimited,  and 
supply  very  limited.  Governments  could  not  tolerate 
profiteering,  under  cover  of  the  law  of  supplj^  and 
demand,  on  the  part  of  those  possessed  of  goods,  services, 
or  credit,  in  the  face  of  the  dire  necessity  of  the  whole 
people.  So  they  fixed  the  prices  of  commodities,  con- 
trolled exports  and  imports  and  gave  priority  orders, 
took  control  of  transportation  on  land  and  sea,  restricted 
capital  issues,  restricted  the  export  of  gold  and  silver  and 
controlled  transactions  in  foreign  exchange,  sought  per- 
sonal saving  in  food,  fuel  and  money,  and  drafted  the 
man  power  of  the  nations  and  sent  it  to  war.  And  they 
fixed  the  price  of  credit  too. 

But  Government  war  expenditures  put  too  much 
money  into  the  pockets  of  people  who  were  not  accus- 
tomed to  have  it.  They  got  it  as  an  inducement  to  work 
as  hard  and  fast  and  effectively  as  Governments  asked 
them  to  do.  Instantly  upon  the  signing  of  the  armistice 
many  persons  abandoned  the  restraint  to  which  they  had 
subjected  themselves  during  the  period  of  active  warfare 
and    indulged   themselves    in    idleness   or   half-hearted 

xxi 


INTRODUCTION 

labor  and  m  loose  expenditures.  War  wages,  war  profits, 
and  war  bonds  represented  just  so  much  accumulated 
buying  power  in  the  hands,  very  largely,  of  those  who 
were  unaccustomed  to  have  it.  The  war  being  over,  we 
had  to  have  our  fling,  and  the  fling  being  over,  we  have 
to  take  our  medicine. 

Deflation  of  prices  seems  to  have  started  during  the 
early  months  of  1920  with  the  Chinese  boycott  of 
Japanese  goods  for  political  reasons,  which  pricked  the 
bubble  of  Japan's  war  prosperity.  Price  deflation  had 
made  great  strides  all  over  the  world  by  the  end  of  1920, 
though  inflation  of  currency  and  credit  continued  unre- 
strained on  the  European  continent,  and  was  not  pre- 
vented, though  it  was  retarded,  in  England  and  the 
United  States  by  the  dear-money  policy  adopted  by  the 
Bank  of  England  in  November,  1919,  and  the  Federal 
Eeserve  Banks  in  January,  1920. 

In  Europe  after  the  armistice,  while  the  resumption 
of  business  activity  and  production  awaited  assurance  of 
peace  and  political  stability,  still  unhappily  withheld, 
millions  of  men  were  kept  under  arms  and  more  or  less 
desultory  warfare  continued.  Governments  kept  them- 
selves in  power  by  means  of  this  military  activity,  by 
distributing  food  at  less  than  cost,  and  by  making  unem- 
ployment allowances,  which  subsidized  idleness,  and  paid 
the  bills  by  printing  currency  because  taxes  and  loans 
were  unpopular.  War  necessity  is  the  only,  though  per- 
haps sufficient,  justification  for  the  defiance  of  economic 
law.  One  of  the  greatest  evils  left  by  the  war  in  its 
train  was  the  habit  of  mind  that  looks  to  government  to 
do  all  things  and  tolerates  government  practices  that  in 
times  of  peace  are  unsound,  if  not  downright  dishonest. 
Government  expenditure  is  the  root  of  all  present 
economic  and  social  evil.  To  allay  domestic  discontent 
by  subsidies  and  doles  from  the  public  treasury  involves 
the  disturbance  of  social  and  economic  laws  for  political 

sxii 


INTRODUCTION 

purposes.  The  issue  of  paper  mouey  to  meet  government 
expenditures  is  a  form  of  surreptitious  taxation,  which 
imposes  the  burden  of  government  expense  most  heavily 
upon  those  in  the  community  least  able  to  bear  it  and 
leads  ultimately  to  bankruptcy.  Embargoes  upon  the 
exportation  of  gold,  persisted  in  in  time  of  peace  by  all 
the  countries  of  the  world  except  the  United  States,  pre- 
serve the  basis  for  internal  inflation  and  amount  to  the 
refusal  of  payment  of  international  indebtedness.  Em- 
bargoes on  the  importation  of  securities  by  the  country 
of  issue  amount  to  their  dishonor.  Embargoes  on  the 
importation  of  goods,  whether  frankly  so  called  or 
masquerading  as  proteciive  tariffs,  retard  economic 
recovery  and  lay  the  basis  for  future  wars. 

Europe  has  many  overpopulated  areas  and  hast  great 
populations,  ordinarily  emploj^ed  in  making  finished 
products  for  export  from  imported  materials,  and  fed  in 
large  part  from  imported  foods.  She  cannot,  therefore, 
have  prosperous  economic  life  until  her  currencies  have 
a  reasonably  firm  value  in  foreign  exchange.  It  would 
be  better  if  each  of  these  currencies  had  a  definite  gold 
value,  even  if  it  were  very  much  less  than  the  pre-war 
gold  value,  than  that  European  Governments  should 
continue  to  print  irredeemable  paper  to  produce  foreign 
exchange  or  current  funds  at  home.  "We  cannot  have 
free  and  orderly  international  commerce  without  rather 
stable  currencies  all  over  the  world.  The  inability  of 
Great  Britain  and  the  European  neutrals  to  resume 
specie  paj^ment  grows  doubtless  out  of  their  fear  of  being 
drained  of  their  whole  gold  supply  because  their  neigh- 
bors in  Europe,  to  whom  they  must  sell,  cannot  pay  for 
what  they  buy.  The  problem,  therefore,  is  to  find  what 
is  necessary  to  give  France,  Itah^,  Belgium,  and  Central 
Europe  sound  currencies  and  to  prepare  them  to  resume 
specie  payment.  The  war  has  burdened  the  continental 
Allies  with  very  heavy  debts  to  Great  Britain  and  the 

xxiii 


INTRODUCTION 

United  States,  and  Germany  with  heavy  indemnity  pay- 
ments to  the  Allies.  It  has  deprived  Europe  of  a  large 
part  of  her  ''invisible"  exports.  Obviously  gold  cannot 
be  found  to  meet  any  balance  by  which  the  exports  of 
any  of  these  countries  fall  below  the  sum  of  their  imports 
and  such  extraordinary  war  payments.  The  European 
world  has  not  gold  enough  for  its  own  requirements  as 
domestic  reserve,  let  alone  for  any  continuous  or  per- 
manent drain  to  meet  foreign  balances.  Gold  cannot  be 
used  to  settle  a  continuing  adverse  foreign  balance.  It  is 
only  suitable  to  settle  a  seasonal  or  occasional  balance 
except  in  a  country  which  is  itself  a  substantial  producer 
of  gold.  Most  of  these  countries  require  a  certain 
amount  of  working  capital  from  abroad  to  enable  them 
to  set  their  industries  going  at  maximum  efficiency. 

The  reasonably  prompt  economic  rehabilitation  of 
Continental  Europe  can  be  had  through  (1)  peace  and 
disarmament;  (2)  freer  trade  and  the  open  door;  (3) 
balancing  budgets,  stopping  the  printing  press,  and 
resuming  specie  payment  both  at  home  and  in  foreign 
exchange,  currencies  being  revalued,  if  necessary,  in 
terms  of  gold;  (4)  a  composition  wuth  foreign  govern- 
ment creditors,  particularl}'  Great  Britain  and  the 
United  States;  and  (5)  capital  issues  (not  merely  bank 
credits)  through  private  channels  to  provide  working 
capital  in  foreign  markets.  America  will  be  greatly  the 
gainer  when  Europe,  her  best  customer,  recovers  true 
buying  power  and  her  own  speculatively  inclined  people 
no  longer  have  to  accept  irredeemable  currencies  and 
credits  in  exchange  for  dollar  values.  America  has 
everything  to  gain,  and  nothing  to  lose,  by  accepting  the 
moral  leadership  imposed  upon  her  by  the  war,  and 
dealing  constructively,  even  generously,  with  the  eco- 
nomic problems  of  the  European  Allies.  If  she  will  not, 
she  stands  to  lose  the  whole  world  as  well  as  her  own  soul. 

R.  C.  Leffingwell. 


WAR  COSTS  AND 
THEIR  FINANCING 


CHAPTER  I 

THE   BASIS   OP   NATIONAL    AND   INTERNATIONAL   CREDIT 

Industrial  development  furnishes  a  supply  of  capital  —  Develop- 
ment of  credit  and  financial  institutions  provide  a  money 
market  —  Political  democracy  creates  a  willingness  to  lend — - 
The  growth  of  public  debts  —  Opportunity  for  profit  in  the 
exploitation  of  undeveloped  countries  —  Investments  in  for- 
eign countries  —  London  an  international  money  market  and 
center  of  credit. 

The  "World  "War  wliich  has  ravaged  Europe  and  set 
back  by  at  least  a  generation  the  progress  of  the  world 
is  estimated  to  have  cost  in  direct  expenses  of  the  Gov- 
ernments involved  not  less  than  $200,000,000,000.  Most 
of  this  enormous  sum  was  obtained  by  means  of  popular 
loans.  It  is  evident  that  it  was  possible  to  wage  war  on 
the  scale  of  the  late  struggle  and  with  the  highly  per- 
fected technical  appliances  so  lavishly  employed  in  it, 
not  merely  because  of  the  development  of  military 
strategy  or  of  engineering  and  chemical  science,  but  also 
because  of  the  growth  of  the  art  and  science  of  finance. 
Before  the  vast  sums  required  could  be  obtained,  a  sys- 
tem of  national  credit  must  have  been  developed.  In 
any  discussion  of  war  costs  the  question  at  once  presents 
itself  as  to  where  all  the  money  came  from  to  pay  for 
the  war,  and  how  the  Governments  were  able  to  persuade 
their  peoples  to  place  it  at  their  disposal.  This  very 
statement  of  the  problem  suggests  at  least  three  funda- 
mental conditions  for  the  development  of  national 
credit.  There  must  be  an  adequate  supply  of  disposable 
capital ;  there  must  exist  the  mechanism  and  machinery 
for  the  collection  and  distribution  of  this  capital;  and, 

1 


WAR  COSTS  AND  THEIR  FINANCING 

finally,  the  lenders  must  have  some  adequate  guarantee 
that  it  will  be  repaid. 

Modern  industrial  society  is  so  thoroughly  capitalistic 
that  we  often  fail  to  realize  how  comparatively  recent 
is  the  existence  of  capital  in  large  amounts  and  its 
utilization  for  any  desired  purpose.  During  the  period 
from  the  fourth  to  the  sixteenth  centuries  most  of  the 
capital  in  the  world  was  invested  in  agriculture.  The 
discovery  of  the  shorter  route  to  India  and  of  the  New 
World  called  into  existence  a  new  category  —  com- 
mercial and  mercantile  capital.  Proof  of  the  existence 
of  considerable  amounts  of  free  disposable  capital  in 
England  may  be  found  in  the  rapidity  with  which 
London  was  rebuilt  after  the  great  fire  of  1666  and  the 
large  sums  that  were  lost  in  the  speculative  manias,  or 
"bubble"  companies,  of  1720.  As  a  result  of  the 
excesses  of  the  latter  period  corporate  organization  was 
repressed  for  almost  a  century.  It  was  not  until  after 
the  industrial  revolution  in  England  at  the  end  of  the 
eighteenth  century  that  we  can  recognize  industrial 
capital.  Moreover,  down  to  the  very  beginning  of  the 
nineteenth  century  capital  was  almost  entirely  per- 
sonal—  that  is  to  say,  the  capitalist  went  with  his 
capital.  Almost  every  business  was  carried  on  with  the 
merchant's  or  the  manufacturer's  own  funds.  If  these 
were  insufficient,  the  additional  sum  necessary  was 
obtained  by  forming  a  partnership  with  a  wealthy  man. 
The  nineteenth  century,  however,  saw  a  tremendous 
growth  in  the  formation  of  joint-stock  companies  and  of 
corporations. 

The  development  of  corporations  with  limited  lia- 
bility of  individual  shareholders  greatly  stimulated  the 
investment  habit.  Capital  now  became  impersonal:  it 
could  be  invested  in  enterprises  Avithout  the  necessity 

2 


NATIONAL  AND  INTERNATIONAL  CREDIT 


of  managing  or  supervising  its  use.  Hitherto  the 
national  debt  had  afforded  almost  the  only  investment 
of  this  character,  and  as  a  consequence  the  rate  of 
interest  on  Government  bonds  was  extremely  low;  the 
subsequent  fall  in  the  price  of  Consols  was  the  result, 
not  of  an  impairment  of  the  national  credit  of  Great 
Britain,  but  rather  of  the  multiplication  of  other  safe 
forms  of  investment.  The  development  of  manu- 
factures, of  mining,  and  of  railroad  and  water  trans- 
portation offered  attractive  and  productive  fields  of 
investment,  and  the  growth  of  capital  went  on  apace 
during  the  nineteenth  century.  An  illustration  of  the 
amazing  expansion  which  occurred  within  a  century 
may  be  found  in  the  growth  of  the  value  of  manu- 
factures in  the  principal  industrial  countries  of  the 
world  between  1780  and  1888.  This  is  shown  in  the 
following  table  ■} 

Value  of  Manufactures  in  Various  Countries,  1780-1888 
(In  millions) 


Country 

1780 

1800 

1820 

1840 

1860 

1888 

United  Kingdom.  . .  . 
France 

$885 

235 

250 

50 

150 

50 

50 

$1 . 150 
950 
300 

75 
250 

75 
100 

$1,450 
1,100 
425 
100 
900 
125 
130 

$1,935 
1,320 
750 
200 
710 
200 
225 
300 
480 
450 

$2,885 

1,900 

1,550 

775 

1,000 

400 

300 

450 

1,960 

800 

$4,100 
2,425 

Germany 

2,915 

Russia       

1,815 

Austria 

1,265 

Italy 

605 

Spain     

425 

Belgium 

510 

United  States 

Various 

75 
155 

125 
225 

275 
300 

7,215 
1,815 

Total 

$2,400 

$3,250 

$4,305 

$6,570 

$12,020 

$23 , 090 

'Based   on    M.   G.   Mulhall,   Dictionary   of   Statistics    (London 
isn2),  p.  365. 

3 


WAR  COSTS  AND  THEIR  FINANCING 

The  explanation  of  the  enormous  growth  in  manu- 
facturing capacity  is  to  be  found  primarily  in  the  use 
of  non-human  power.  A  new  era  in  human  history  was 
introduced  with  the  invention  of  the  steam  engine. 
Before  that  event  production  was  limited  by  the  number 
of  human  hands  available;  afterwards  the  only  limit 
was  man's  ingenuity  in  fashioning  new  machines  to  do 
his  work.  The  last  thirty  years  has  seen  an  increase 
in  the  mastery  of  man  over  nature  greater  than  that  of 
any  similar  preceding  period.  Electricity  and  motor 
fuels  have  supplemented  and  in  some  cases  supplanted 
the  work  of  steam  and  h^ve  vastly  increased  production. 
Science  has  been  called  to  the  assistance  of  industry, 
and  has  not  only  increased  output,  but  has  improved 
quality  and  reduced  cost.  Industry  has  come  more  and 
more  to  be  carried  on  by  the  use  of  capital  and  less  by 
the  direct  application  of  human  muscle.  The  vast 
increase  which  has  taken  place  throughout  the  world 
in  capital  available  for  productive  enterprises  may  be 
gauged  by  the  statistics  of  the  growth  of  wealth  in  the 
United  Kingdom,  France,  and  the  United  States  shown 
on  the  following  page. 

Before  national  credit  can  be  developed,  however, 
there  must  exist  in  the  community  not  merely  a  fund  of 
disposable  capital,  but  a  securities  market  in  which  this 
capital  can  be  disposed  of  must  also  have  been  created. 
Credit  and  financial  institutions,  banks,  stock  exchanges, 
brokers,  credit  instruments,  commercial  law,  and  other 
financial  appliances  of  a  highly  developed  industrial 
people  are  essential  to  the  proper  functioning  of  the 
economic  machine  known  as  modern  industry.  Banks 
are  essential  first  of  all  as  agencies  for  collecting  the 
small  savings  of  the  people,  massing  them  into  larger 
sums  and  placing  these  at  the  disposal  of  industrial 

4 


NATIONAL  AND  INTERNATIONAL  CREDIT 


Value  of  Property  in  the  United  Kingdom,  France,  and  the 
United  States 

{In  millions) 


Year 

VALUE  OF  PROPERTY 

Total 

Per  capita 

United  Kingdom 

1822 
1845 
1865 
1890 
1910 

1853 
1878 
1886 
1910 

1850 
1870 
1890 
1910 

$12,500 
20,000 
30,000 
50,000 
72,500 

25,000 
35,000 
40,000 
59,000 

7,135 

30,068 

05,037 

187,739* 

$600 

715 

1,000 

France , 1 

United  States 

1,350 
1,560 

700 

930 

1,050 

1,475 

308 
780 

1,036 
2,040 

*  Estimate  of  Census  Bureau,  1912. 


enterprise.  Before  it  can  be  used,  capital  must  first  of 
all  be  produced,  and  then  it  must  be  saved  and  made 
available  for  use  in  further  production.  But  the  modern 
commercial  bank  does  more  than  this.  It  transfers  the 
control  of  industry  and  of  labor  to  the  possessor  of 
credit;  in  other  words,  it  provides  the  mechanism  and 
machinery  by  which  the  capital  of  the  community  is 
brought  under  the  direction  of  those  who  can  presum- 
ably make  the  best  economic,  or  possibly  social,  use  of 
it,  who  can  at  least  pay  the  best  rate  of  interest,  all 
things  considered. 

If  capital  is  a  new  phenomenon,  banks  are  still  more 

5 


WAR  COSTS  AND  THEIR  FINANCING 

recent.  Modern  banking  may  he  said  to  date  from  the 
Florentine  banks  of  the  thirteenth  and  fourteenth  cen- 
turies, although  the  first  bank  of  record,  the  Bank  of 
Venice,  was  established  in  1171.  The  seventeenth  cen- 
tury saw  the  establishment  of  banks  in  Amsterdam 
(1609),  Hamburg  (1619),  Sweden  (1688),  and  England 
(1694).  Not  until  1800  was  the  Bank  of  France  estab- 
lished and  the  great  central  institutions  of  Germany, 
Italy,  Russia  and  other  countries  were  organized  at  still 
later  dates.  The  earlier  institutions  were  banks  of  de- 
posit only,  until  the  Bank  of  Sweden,  in  1790,  for  the 
first  time  issued  bank  notes.  Deposit  banking  in  the 
modern  sense  is  a  development  of  the  nineteenth  cen- 
tury; it  was  not  until  after  1844  that  deposit  banking 
and  the  use  of  checks  took  on  large  dimensions  in 
England,  and  in  other  countries  its  development  was 
much  later.  But  the  growth  of  deposit  banking  was 
important,  not  merely  in  providing  a  market  for  capital, 
but  also  in  stimulating  the  investment  habit. 

Still  more  recent  in  development  has  been  the  growth 
of  stock  and  produce  exchanges.  This  was  an  evolution 
of  modern  business,  the  stock  exchange  being  a  product 
of  the  eighteenth  century,  and  the  produce  and  cotton 
exchanges,  of  the  nineteenth  century.  The  system  of 
option  trading  was  only  developed  during  the  latter  half 
of  the  nineteenth  century.  The  oldest  of  the  modern 
exchanges,  the  Paris  Bourse,  dates  from  1726;  the 
London  Stock  Exchange  dates  from  1773,  and  the  New 
York  Stock  Exchange  w^as  not  founded  until  1817. 
With  the  creation  of  these  exchanges  and  of  credit  insti- 
tutions it  became  possible  to  trade  in  the  evidences  of 
debts  of  governments  and  of  private  corporations;  in 
other  words,  a  securities  market  was  established. 

It  is  scarcely  necessary  to   establish   the   fact  of  a 

6 


NATIONAL  AND  INTERNATIONAL  CREDIT 

demand  for  capital  in  the  modern  industrial  state,  on 
the  part  either  of  private  borrowers  or  of  the  State 
itself.  The  extent  of  such  a  public  demand  is  sufficiently 
evidenced  by  the  growth  of  public  debts.  Here  the 
interesting  question  arises :  What  forces  operate  to 
induce  owners  of  capital  to  lend  it  to  States  or  Govern- 
ments? The  answer  to  this  question  is  political  rather 
than  economic,  and  is  found  in  the  existence  of  some 
adequate  security  to  the  lender  that  the  sum  borrowed 
will  be  returned.  As  a  sovereign  State  may  repudiate 
its  obligations  at  its  pleasure  and  cannot  be  sued  or 
have  judgment  entered  against  it,  such  a  guarantee 
would  seem  especially  difficult  to  obtain.  But  in  fact 
the  strongest  sort  of  security  exists  in  the  control  of 
Government  by  the  propertied  class.  "  It  follows  from 
this,"  writes  Professor  Adams,^  "  that  when  property 
owners  lend  to  the  Government,  they  lend  to  a  corpora- 
tion controlled  by  themselves."  As  they  are  not  likely 
to  repudiate  a  debt  that  is  owed  to  themselves,  a  public 
debt  really  rests  upon  the  strongest  sort  of  security. 

Public  borrowing  has  therefore  accompanied  the 
growth  of  constitutional  government ;  it  has  had  its 
greatest  development  since  1848,  when  constitutionalism 
became  predominant  in  Europe.  Above  all  else  is 
needed  the  guarantee  of  a  stable  and  honest  Government. 
The  mere  forms  of  constitutionalism  will  not  alone  main- 
tain the  credit  of  a  State,  as  witness  the  experience  of 
many  a  Latin-American  republic.  On  the  other  hand, 
there  can  be  no  stronger  guarantee  than  that  given 
by  a  Government  resting  upon  the  constitutionally 
expressed  consent  of  the  governed.  Political  democracy 
creates  a  willingness  to  lend  by  affording  a  guarantee 
against  repudiation. 

^  Henry  C.  Adams,  Public  Debts,  p.  9. 

7 


WAR  COSTS  AND  TtlEIR  FINANCING 

The  existence  of  a  fund  of  loanable  capital,  of  a 
money  market,  and  of  an  adequate  security  against  loss 
constitutes,  however,  only  the  favoring  conditions  for 
the  growth  of  public  debts ;  they  do  not  explain  the  wil- 
lingness, nay,  the  eagerness,  of  modern  States  to  borrow. 
The  explanation  of  this  universal  characteristic  may  be 
found  in  two  directions.  In  the  first  place,  the  modern 
State  is  an  industrial  State  and  is  called  upon  to  do 
many  things  for  its  citizens  which  they  did  not  demand 
a  hundred  years  ago.  From  street  railways  and  sewers 
to  public  baths  and  vocational  schools,  the  expenditures 
of  Governments  have  increased  so  rapidly  that  they 
frequently  find  it  easier  to  meet  their  outlays  by  bor- 
rowing than  by  resort  to  taxation.  But  far  more 
important  than  loans  for  investment  purposes  or  to  meet 
casual  deficits  liaA'e  been  those  contracted  for  war. 
Armament,  or  preparation  for  war,  and  the  actual  costs 
of  war  itself  are  responsible  for  most  of  the  indebted- 
ness which  burdens  the  nations  of  to-day.  The  follow- 
ing table  shows  the  growth  of  the  aggregate  public  debts 
of  the  civilized  governments  of  the  world  during  the 
last  half-century  prior  to  the  World  War:^ 

Geowth  of  Public  Debts,  1848-1913 

1848  $7,627,692,215 

I860  10.390.341,688 

1870  17.117.640.428 

1880  27.421.037.643 

1890  27.524.076.915 

1908  36.548.455.489 

1912  42.000.000.000 

1913  42,940,000,000 

The  larger  increases  shown  in  this  table  were  the 
result  of  war  or  of  preparation  for  war.  The  period 
lietwoen  1848  and  1860  was  one  of  armament,  marked 

'  C.  C.  Plehn,  Introduction  to  Public  Finance    (3d  edition),  n. 
367.  '■ 


NATIONAL  AND  INTERNATIONAL  CREDIT 

by  several  small  outbreaks  like  the  Crimean  War. 
Between  1860  and  1870  the  American  Civil  War  and  the 
Prussian-Austrian  War  increased  public  debts  by 
nearly  70  per  cent.  The  following  decade,  within  which 
fell  the  Franco-Prussian  War,  saw  the  greatest  increase 
of  any  period.  The  longer  period  from  1890  to  1908 
witnessed  our  own  war  with  Spain,  the  Boer  War,  and 
the  Russo-Japanese  War.  The  four  years  1908-1912  were 
years  of  preparation,  of  military  and  naval  expansion, 
and  of  armament.  The  only  period  in  this  table  that 
did  not  show  a  marked  increase  in  the  growth  of  debt 
(from  1880  to  1890)  was  the  only  one  that  was  marked 
by  general  peace,  although  the  rapid  reduction  of  the 
Civil  War  debt  in  the  United  States  during  this  period 
accounts  in  part  for  the  smallness  of  the  increase. 

But  although  war  has  been  chiefly  responsible  for 
this  huge  burden  of  public  debt,  much  of  it  has  been 
incurred  for  the  purpose  of  economic  development,  the 
other  of  the  two  objects  for  which  financiers  agree  that 
a  funded  debt  may  properly  be  created.  Between  these 
two  purposes  there  are  many  differences.  A  war  debt 
is  unproductive ;  it  lessens  rather  than  increases  the 
debtor's  ability  to  pay  (leaving  indemnities  out  of 
account)  ;  it  usually  becomes  a  permanent  burden  on 
the  nation.  An  investment  loan,  on  the  other  hand,  is 
productive ;  it  increases  the  efficiency  of  the  borrower 
and  creates  the  fund  out  of  which  the  debt  may  be 
paid;  finally,  it  is  usually  expunged  within  the  life  of 
the  improvement.  There  is  one  other  significant  differ- 
ence between  these  two  kinds  of  debt :  the  war  debt  is 
usually  a  domestic  debt,  while  that  for  "internal 
improvements,"  as  they  are  designated  in  the  United 
States,  has  generally  been  raised  by  means  of  foreign 
loans ;  in  other  words,  wars  may  be  financed  by  means 

9 


WAR  COSTS  AND  THEIR  FINANCING 

of  national  credit,  but  the  internal  development  of 
young  countries  awaits  the  growth  of  international 
credit. 

The  principles  underlying  the  development  of  inter- 
national credit  are  essentially  the  same  as  those  upon 
which  national  credit  is  based.  A  supply  of  capital  must 
exist,  not  merely  adequate  for  the  industrial  needs  of 
the  lending  country  but  sufficient  also  for  export;  in 
other  words,  there  must  be  surplus  capital.  The  machin- 
ery for  the  collection  and  distribution  of  this  capital 
must  now  be  international  in  scope ;  there  must  be  inter- 
national banks  and  trading  companies,  international 
shipping  and  insurance  concerns,  etc.  Finally,  sufficient 
guarantees  must  be  given  that  the  debts  will  be  repaid. 
Here  lies  the  most  difficult  problem  of  international 
borrowing,  for  attempts  by  the  Governments  of  lenders 
to  enforce  payment  from  the  borrowers  have  not  infre- 
quently led  to  international  imbroglios  and  even  to  open 
war.  What,  then,  is  the  motive  that  induces  the  citizens 
of  one  country  to  lend  to  those  of  another,  or,  in  other 
words,  what  is  the  basis  of  international  credit?  It  is, 
in  a  word,  the  hope  of  large  profits. 

The  borrowing  nations  in  the  world  economy  are  in 
general  those  with  undeveloped  resources ;  they  are  the 
countries  young  or  industrially  backward,  but  possessed 
at  the  same  time  of  great  natural  resources  the  exploita- 
tion of  which  promises  rich  return.  The  investment  of 
capital  in  these  countries  results  in  a  large  increase  in 
production  which  enables  the  payment  of  interest  and 
ultimately  the  repayment  of  the  borrowed  capital.  By 
securing  the  capital  goods  of  an  industrially  developed 
country,  the  improved  agricultural  machinery,  mining 
machinery,  railroad  construction  material  and  rolling 
stock,  etc.,  the  young  country  is  able  to  avoid  the  slow 

10 


NATIONAL  AND  INTERNATIONAL  CREDIT 

and  painful  process  of  inventing  and  producing  this 
equipment.  It  secures  at  once  the  latest  devices  of 
man's  ingenuity.  Equipped  with  those  implements, 
such  a  country  is  able  to  multiply  its  productive 
capacity  many  fold.  Perhaps  no  other  single  form  of 
investment  of  foreign  capital  shows  this  result  more 
quickly  than  expenditure  for  railways.  The  natural 
resources  of  the  new  country  are  thereby  brought  at 
once  within  the  reach  of  a  market. 

The  opportunity  for  large  profits  through  the  develop- 
ment of  the  resources  of  an  undeveloped  country  has 
unhappily  led  to  the  exploitation  of  men  as  well  as  of 
nature  and  to  political  intrigue  and  international  mis- 
understanding. The  colonial  trader  was  indeed  once  the 
chief  cause  of  wars,  but  his  place  has  now  been  taken 
by  the  concessionary  interest.*  Fortunes  have  been 
accumulated,  especially  in  the  tropical  and  semi-tropical 
regions,  by  the  exploitation  of  natural  resources,  the 
opening  of  oil  fields  and  mines,  the  building  of  railways 
and  water-power  plants,  and  by  other  enterprises.  Such 
concessions  are  a  prolific  cause  of  war  as  they  need  and 
demand  the  support  of  the  home  Government. 

Here  we  are  concerned,  however,  with  the  legitimate 
investment  of  the  surplus  capital  of  an  older  State  in 
the  undeveloped  resources  of  a  younger  one.  This  is 
immediately  reflected  in  the  trade  relation  between  the 
two  countries  and  continues  to  affect  the  balance  of 
trade  until  the  debt  is  entirely  expunged.  All  the 
nations  of  the  world  may  be  grouped  in  one  or  the  other 
of  these  classes,  the  lending  and  the  borrowing  countries. 
The  chief  countries  that  have  supplied  capital  to  other 

*  Foreign  investment  and  concessions  are  discussed  at  length  in 
this  series  in  W.  S.  Culbertson,  Commercial  Policy  in  War  Time 
and  After.  Cf.  also  A.  S'.  Johnson,  "The  War:  By  an  Econ- 
omist," Unpopular  Review,  ii   (July-December,  1914),  p.  411. 

11 


WAR  COSTS  AND  THEIR  FINANCING 

lands  are  Great  Britain,  Germany,  France,  The  Nether- 
lands, Belgium,  and  Switzerland.  Of  these  countries 
Great  Britain  is  by  far  the  most  important  lender.  On 
the  other  hand,  the  important  borrowing  countries  have 
been  the  United  States,  Canada,  the  Australian  colonies 
of  Great  Britain,  British  India,  Argentina,  Chile, 
Mexico,  China,  and  Japan. 

In  these  movements  of  capital  Professor  Seligman 
finds  the  fundamental  underlying  explanation  of  the 
late  world  conflict.  Nations  pass  through  three  stages 
of  economic  national  development.  In  the  first  they 
develop  their  resources  and  build  up  their  industries, 
isolating  themselves  by  means  of  a  protective  tariff.  In 
the  second  stage  of  economic  nationalism  they  export 
commodities  and  seek  colonial  expansion.  In  the  third 
stage  they  supplement  the  export  of  commodities  with 
the  export  of  capital,  when  they  find  it  to  their  advan- 
tage to  preach  the  gospel  of  cosmopolitanism  and  the 
benefits  of  international  trade.  Great  Britain  had 
already  been  long  in  the  third  stage;  Germany,  just 
emerging  from  the  second,  found  in  that  country  her 
strongest  rival.  The  export  of  capital  yielded  its  great- 
est profits  in  the  economic  penetration  of  backward 
countries,  and  in  this  Germany  was  determined  to  par- 
ticipate at  all  hazards.  This  was  her  '*  place  in  the 
sun."  The  industrial  inequality  of  different  countries 
permitted,  and  in  fact  induced,  the  exploitation  of  the 
backward  ones  by  those  capitalistically  developed. 
Hence  international  investment  of  capital,  which  should 
jn-omote  international  peace  and  good  will,  has  in  fact 
become  the  gage  of  an  economic  struggle  between 
nations.® 

=  E.  "R.  A.  Selirrman.  "  An  Economic  Interpretation  of  the  War," 
in  Problems  of  Readjustment  after  the  War    (1915),  pp.  55,  61. 

12 


NATIONAL  AND  INTERNATIONAL  CREDIT 

The  lending  and  borrowing  of  capital  takes  place  by 
the  transfer  of  commodities,  and  the  extent  of  this 
movement  is  evidenced  by  statistics  of  exports  and 
imports.  One  would  therefore  expect  a  lending  country 
to  export  more  than  it  imported  and  a  borrowing  coun- 
try, on  the  other  hand,  to  import  more  than  it  exported. 
The  movement  has  gone  on  so  long,  how^ever,  that  the 
wealthy  lending  countries  now  receive  interest  and  other 
payments  in  excess  of  the  annual  investment  of  capital 
in  foreign  lands ;  consequently  their  imports  exceed  their 
exports.  So,  too,  the  payments  on  capital  already 
invested  exceed  the  new  investments  in  the  case  of  the 
more  important  debtor  nations.  In  some  of  the  borrow- 
ing countries,  however,  the  investment  of  capital  is  still 
taking  place  on  a  considerable  scale,  and  their  imports 
continue  to  be  larger  than  their  exports.  The  table  on 
page  15  shows  these  facts  for  1913,  the  last  normal  year 
before  the  World  "War. 

In  a  monograph  submitted  to  the  National  Monetary 
Commission  on  ''  The  Trade  Balance  of  the  United 
States,"^  Sir  George  Paish,  editor  of  the  London  Statist, 
estimated  the  amount  of  capital  invested  by  various 
European  countries  in  the  United  States  about  1909. 
According  to  this  estimate  Great  Britain  possessed  about 
$3,500,000,000  of  American  securities;  French  invest- 
ments amounted  to  nearly  $500,000,000;  the  amount  of 
German  investments  was  placed  at  about  $1,000,000,000, 
and  that  of  Dutch  capital  at  $750,000,000.  In  the 
aggregate  the  amount  of  European  capital  invested  in 
"  permanent  "  securities  in  the  United  States  was 
approximately  $6,000,000,000.  The  net  payments  of 
interest  upon  this  capital  required  the  remittance  annu- 
ally by  the  United  States  of  some  $225,000,000.  Other 
'Report  of  the  National  Monetary  Commission,  xx,  p.  160. 

13 


WAR  COSTS  AND  THEIR  FINANCING 

expenditures,  such  as  tourist  travel,  remittances  by 
immigrants,  freights,  insurance,  etc.,  brought  the  total 
annual  drain  on  American  capital  up  to  $500,000,000  in 
years  of  depression  and  to  $600,000,000  in  years  of 
normal  trade  activity. 

The  export  of  capital  has  been  an  international 
phenomenon  of  growing  importance  during  the  nine- 
teenth and  twentieth  centuries.  In  the  extent  of  her 
foreign  investments  Great  Britain  has  led  all  countries. 
The  amount  of  these  investments  has  varied  from  time 
to  time,  but  on  the  whole  they  have  shown  a  fairly 
steady  increase.  This  was  particularly  marked  in  the 
last  few  years  before  the  outbreak  of  the  Great  War, 
as  is  shown  by  the  following  annual  figures  of  invest- 
ments in  the  colonies  and  abroad  -J 

British  Investments  Abroad,  1907-1912 

19C7  $701,000,000 

1908  649,500,000 

1909  5r)0,500,000 

1910  754,000,000 

1911  061,000,000 

1912  1,130,000,000 

Although  these  figures  do  not  measure  exactly  the 
export  of  capital,  because  of  the  flow  of  securities  back 
and  forth,  they  indicate  roughly  the  enormous  move- 
ment that  was  taking  place.  The  total  amount  of  British 
investments  abroad  at  the  end  of  December,  1913,  was 
estimated  by  Sir  George  Paish  at  about  $20,000,000,000,« 
about  23  per  cent,  of  the  total  capital  investments  of 
the  nation.  This  sum  was  almost  equally  divided 
between  the  British  colonies  and  possessions  on  the  one 
hand  and  foreign  countries  on  the  other.  Of  the  for- 
mer, Canada  was  the  favorite  land  of  investment,  over 

^C.  K.  HohsoTi,  The  Export  of  Capital   (London,  1914),  p.  223. 
^Statist,  February  14,  1914. 

14 


NATIONAL  AND  INTERNATIONAL  CREDIT 


Foreign  Trade  op  Leading  Lendinq  and  Borrowing 

Countries,  1913 

{In  millions) 


Country 


Net 
imports 


Domestic 
exports 


Balance 
of  trade 


Group  I.     Lending  Countries  which  loere  receiving  Net  Income  from 
their  Investments 


Great  Britain 

France 

Netherlands. . 
Germany.  .  .  . 
Belgium 


Excess  of 
imports 

$670 
420 
334 
253 
202 


Group  II.     Borrowing  Countries  whose  Payments  were  Greater  than 
Present  Additions  of  Capital 


United  States 

$1,813 
586 
780 
420 

02,428 
759 
850 

485 

Excess  of 
exports 

$615 

Russia 

173 

British  India 

70 

Argentina 

65 

Group  III.     Bo-^rowing  Countries  in  which  Continued  Investment  of 
Foreign  Capital  is  Still  Taking  Place 


Japan. . 
Canada 
China.  . 
Turkey. 


Excess  of 
imports 

$450 

171 

125 

90 


one-eighth  of  all  foreign  investments  being  placed  there ; 
in  the  other  group  a  still  larger  amount  was  invested 
in  the  L^nited  States.    Other  countries  especially  favored 

15 


WAR  COSTS  AND  THEIR  FINANCING 

by  British  investors  were  India  and  Ceylon,  South 
Africa,  Australia,  Argentina,  and  Brazil,  in  the  order 
named.  Only  about  five  per  cent,  was  placed  in  Europe. 
There  was  evidenced  a  wide  geographical  distribution, 
a  spreading  of  risks  in  many  countries.  The  income 
accruing  from  these  investments  at  the  time  of  the  out- 
break of  the  war  was  probably  about  $1,000,000,000 
per  year. 

Very  different  has  been  the  geographical  distribution 
of  French  and  German  foreign  investments.  Both  of 
these  countries  had  a  later  industrial  development  than 
Great  Britain  and  a  smaller  foreign  trade,  and  conse- 
quently their  investments  outside  of  their  own  borders 
have  not  been  so  large.  Those  of  France  were  estimated 
in  1902  by  the  French  Minister  of  Foreign  Affairs  at 
30,000,000,000  francs.  A  decade  later  M.  Yves  Guyot 
estimated  that  they  had  increased  to  40  to  42,000,000,000 
francs  (8  to  8,400,000,000  dollars),  or  37  per  cent,  of 
the  total  amount  of  French  capital  invested  in  personal 
securities.^  In  1916  C.  K.  Hobson  made  an  estimate  of 
$8,766,000,000.^°  At  the  same  time  Mr.  Hobson  esti- 
mated the  foreign  investments  of  Germany  to  be  about 
$4,870,000,000,  or  about  6.6  per  cent,  of  the  total  inwst- 
ments  of  the  nation.  A  much  higher  estimate  was  given 
by  the  Federal  Trade  Commission,  which  placed  the 
ameunt  of  German  foreign  investments  at  the  begin- 
ning of  the  late  war  at  between  $7,500,000,000  and 
$8,500,000,0000.^^  The  investments  of  the  French 
tended  to  concentrate  in  Europe,  especially  Russia,  Tur- 

' "  Tlie  Amount,  Direction  and  Nature  of  French  Investments," 
Annals  of  the  American  Academy  of  Political  and  Social  Science, 
November,  1916,  pp.  43,  50. 

^"Ihid.,  32. 

"Report  on  Cooperation  in  American  Export  Trade  (1916), 
Part  1,  p.  72. 

16 


NATIONAL  AND  INTERNATIONAL  CREDIT 

key  and  Rumania,  and  in  Mexico,  while  those  of  Ger- 
many were  found  in  the  neigh])oring  countries  of 
Austria-Hungary,  Italy,  Rumania  and  the  Balkans, 
although  both  nations  had  large  interests  in  South 
America  and  South  Africa. 

Belgian  foreign  investments  in  1911  were  estimated 
at  about  $540,000,000,^^  and  those  of  Switzerland  at 
$520,400,000.  The  foreign  holdings  of  the  Dutch  were 
also  considerable.  Those  of  the  capitalists  of  other 
European  countries  are  much  smaller;  no  country  lacks 
them  altogether,  but  in  no  other  case  are  they  compar- 
able with  those  already  mentioned. 

In  addition  to  these  loans  on  the  security  of  bonds, 
stocks,  and  other  securities,  there  has  been  also  in  some 
eases  direct  industrial  investment  by  the  citizens  of  one 
country  in  another  through  the  building  of  plants, 
branch  factories,  etc.  But  the  characteristic  feature  of 
these  international  investments  was  after  all  their 
impersonal  nature;  although  the  capital  itself  was 
exported,  the  owner  remained  at  home  and  drew  his 
interest  or  profits  from  abroad.  So  widespread  have 
been  these  movements  that  no  country  has  been  un- 
affected by  them,  either  as  creditor  or  debtor.  A  per- 
fect network  of  international  finance  bound  the  nations 
of  the  world  together.  Although  these  ties  did  not 
prove  sufficiently  binding  to  prevent  the  outbreak  of 
war  between  the  nations  thus  united,  as  Norman  Angell 
in  his  suggestive  book  The  Great  Illusion  hoped  they 
might,  yet  they  had  important  consequences.  It  is  not 
possible  to  establish  any  connection  between  the  exist- 
ence of  investment  relations  and  the  later  military 
alliances.  Germany  had  invested  largely  in  Austria- 
Hungary  and  Italy,  m  Bulgaria  and  Rumania,  but  she 

"  Ibid. 

17 


WAR  COSTS  AND  THEIR  FINANCING 

had  as  many  enemies  as  friends  among  tliese  nations. 
France  was  the  largest  creditor  of  both  Russia  and 
Turkey,  but  this  fact  did  not  determine  their  allegiance 
in  war.  Nevertheless,  the  existence  of  these  interna- 
tional investments  brought  serious  problems  to  the  front 
upon  the  outbreak  of  the  war.  On  the  whole  the  Central 
Powers  suffered  more  from  the  suspension  of  normal 
credit  relations  between  the  nations  than  did  the  mem- 
bers of  the  Entente.  As  a  basis  for  credits  and  for  use 
as  collateral  the  existence  of  these  foreign  investments 
proved  of  great  service,  especially  for  Great  Britain  and 
France. 

The  flow  of  capital  and  the  movement  of  foreign  trade 
long  ago  became  so  complex  and  intricate  that  a  sort  of 
international  clearing  house  was  needed  to  care  for  these 
transactions.  For  this  purpose  London  was  admirably 
suited.  She  had  first  secured  the  position  as  the  center 
of  international  trade  after  the  sacking  of  Antwerp  in 
1567,  and  although  Amsterdam  later  gained  importance 
as  a  commercial  and  financial  mart,  London  soon  took 
the  leading  place  in  Europe. 

The  predominance  of  London  as  the  world  center  of 
international  trade  was  never  greater  than  during  the 
period  just  before  the  Great  War.  Although  the  direct 
trade  of  other  nations,  as  France,  Germany,  and  to  a 
smaller  extent  Italy  and  Austria-Hungary,  had  in- 
creased, the  share  of  London  in  the  world's  commerce 
grew  steadily.  Her  central  geographical  location  made 
her  the  most  convenient  depot  and  trading  point  for  the 
trade  between  the  Far  East,  Europe,  and  America. 
Great  Britain's  large  mercantile  marine,  her  excellent 
mail  and  cable  connections,  and  a  comprehensive  insur- 
ance system  gave  London  special  facilities  for  handling 

18 


NATIONAL  AND  INTERNATIONAL  CREDIT 

the  business,  iu  connection  with  which  an  expert  trading 
organization  had  been  developed.  Especially  important 
was  the  highly  perfected  banking  system,  which  was 
peculiarly  adapted  to  the  granting  of  the  short-term 
loans  called  for  in  financing  this  world  trade.  Hence 
most  international  payments  were  made  in  London  and 
international  accounts  were  cleared  there.  Foreign  bank- 
ing houses  kept  deposits  in  London.  Bills  of  exchange 
were  generally  drawn  on  London.  Banks  and  ex- 
porters in  South  America,  India,  or  Europe  were  paid 
in  these  bills,  which  were  accepted  by  the  English  banks. 
Sterling  became  the  currency  of  international  com- 
merce. ]Mr.  Lloyd  George  described  these  operations  in 
a  speech  in  November,  1914,  as  follows: 

I  ask  anyone  to  pick  up  just  one  little  bit  of  j^aper,  one 
bill  of  exchange,  to  find  out  what  we  are  doing.  Take  the 
cotton  trade  of  the  world.  The  cotton  is  moved  first  of  all 
from  the  plantations,  say,  to  the  Mississippi;  then  it  is  moved 
down  to  New  Orleans;  then  it  is  moved  either  to  Germany  or 
Great  Britain  or  elsewhere.  Every  movement  there  is  repre- 
sented by  a  paper  signed  either  here  in  London  or  Manchester 
or  Liverpool;  one  signature  practically  is  responsible  for  the 
Avhole  of  those  transactions.  Not  merely  that,  but  when  the 
United  States  of  America  bought  silk  or  tea  in  China  this  paj'- 
ment  was  made  through  London.  By  means  of  these  documents 
aecei:)ted  in  London,  New  York  paid  for  the  tea  that  Avas 
bought  from  China.  We  were  transacting  far  more  than  the 
whole  of  our  own  business;  we  were  transacting  half  the  busi- 
ness of  the  world  as  well  by  means  of  these  paper  transac- 
tions. T^Tiat  is  also  important  to  establish  is  this:  that  the 
paper  which  was  issued  from  London  has  become  part  of  the 
currency  of  commerce  throughout  the  world. 

So  intimate  and  close  were  the  economic  and  com- 
mercial bonds  which  united  nations,  and  so  large  was 
the  stream   of  goods  which   Ilowed  in  every  direction 

19 


WAR  COSTS  AND  THEIR  FINANCING 

between  them  that  it  seemed  to  many  that  the  stage 
of  a  world  economy  had  actually  been  reached.  Although 
nationalism  had  lost  nothing  of  its  strength,  a  new 
economic  internationalism  was  developing  which  gave 
promise  of  checking  militarism  and  of  securing  peace 
to  the  world.  The  war  was  to  show,  however,  that  the 
program  of  economic  internationalism  might  not  suit 
the  nationalistic  ambitions  of  a  vigorous  but  misguided 
people. 


CHAPTER  II 

FINANCIAL  READJUSTMENTS  AT  THE  OUTBREAK  OF  WAR 

Germany's  preparedness  —  The  Entente  Allies  caught  unaware  — 
Panic  and  temporary  breakdown  of  credit  —  Remedial  meas- 
ures—  Safeguarding  the  gold  reserves  —  Issue  of  additional 
money  —  Adjustment  to  war  conditions. 

In  spite  of  a  generation  of  armament  and  war  talk 
the  actual  outbreak  of  war  on  August  1,  1914,  fell  upon 
an  unprepared  world.  Germany  alone  of  all  the  com- 
batants was  ready.  She  had  made  full  preparation,  not 
only  of  a  military  nature,  but  also  with  equal  care  and 
thoroughness  along  financial  lines.  It  is  said  that  at 
the  time  of  the  Morocco  episode  in  1911  the  Kaiser 
decided  that  the  time  was  ripe  for  Germany  to  strike, 
but  was  informed  by  his  Minister  of  Finance  that  the 
financial  situation  would  not  permit  a  declaration  of 
war.  Thereupon  he  told  the  Minister  of  Finance  to  see 
to  it  that  the  next  time  he  asked  that  question  he 
received  a  different  answer.  Wliether  this  story  is  true 
or  not,  it  is  certain  that  since  the  Morocco  episode  Ger- 
many had  taken  steps  to  strengthen  herself  financially 
in  various  respects.  At  that  time  she  owed  large  sums 
abroad,  and  upon  the  threat  of  war  French  capitalists 
called  in  large  balances  due  them  by  German  banks 
and  also  began  to  dispose  of  German  securities.  This 
nearly  brought  on  a  crisis  in  Germany  and  without 
doubt  forced  the  German  militarists  to  yield  their 
demands. 

The  difficulty  with  France  in  1911  was  used  in  the 
following  year  as  an  excuse  to  secure  additional  military 

21 


WAR  COSTS  AND  THEIR  FINANCING 

credits  and  to  increase  the  army.  After  the  Balkan 
wars  in  1913  a  further  addition  was  made  to  the 
army  and  munitions  and  other  materials  of  war  were 
collected.^  To  secure  the  necessary  funds  to  meet  these 
expenditures  the  so-called  Wehrhcitrag  was  imposed,  a 
special,  nonrecurring  tax  on  incomes  and  real  property 
from  which  it  was  expected  to  realize  $250,000,000. 
This  tax  was  to  be  paid  in  three  installments  in  1913, 
1914,  and  1915,  but  these  payments  were  later  post- 
poned a  year,  and  after  the  outbreak  of  the  World  War 
they  were  hardly  distinguishable  from  other  taxes.  In 
the  budget  of  1913  the  revenue  from  this  source  was 
set  down  at  $104,196,750.  The  total  actual  yield  of  the 
Wehrheitrag  during  the  war  was  recently  stated  to  have 
been  $241,713,525. 

Along  with  the  increases  in  the  military  establish- 
ment efforts  were  made  to  build  up  the  gold  reserve  in 
the  war  chest.  The  war  chest  was  a  peculiarly  Prussian 
institution.  Collected  in  Prussia  by  Frederick  the 
Great,  upon  the  formation  of  the  Germany  Empire  it 
had  been  turned  over  to  the  Imperial  Treasury.  A 
part  of  the  French  indemnity,  amounting  to  about 
$30,000,000  in  gold  coin,  had  been  placed  in  the  war 
chest  in  1871.  By  an  act  of  July  3,  1913,  provision 
was  made  for  the  sale  of  Imperial  Treasury  notes  for 
gold  to  a  similar  amount  and  the  addition  of  this  gold 
to  that  already  in  the  war  chest.  About  $21,000,000 
had  actually  been  obtained  and  placed  there  at  the  time 
the  war  broke  out,  so  that  the  war-chest  fund  contained 

*  A  study  of  the  imports  into  Germany  of  copper  and  other 
metals  that  enter  largely  into  war  materials  and  of  cotton,  rub- 
ber and  similar  articles  essential  for  war  purposes  shows  that  the 
purchases  of  all  these  articles  during  1913  and  1914  were  far  in 
excess  of  the  normal  imports  for  the  preceding  decade.  For  a 
discussion  of  German  mineral  imports  immediately  before  the  war 
see,  in  this  series,  George  Otis  Smith,  The  Strategy  of  Mineral*. 

22 


READJUSTMENTS  AT  OUTBREAK  OF  WAR 

between  $50,000,000  and  $60,000,000  m  gold,  in  addi- 
tion to  a  considerable  store  of  silver. 

Efforts  were  also  made  to  build  up  the  stock  of  gold 
in  the  possession  of  the  Reichsbank.  The  theory  had 
previously  been  held  that  it  was  a  wise  financial  policy 
to  secure  as  large  a  circulation  of  gold  among  the  people 
as  possible.  This  saturation  of  the  currency  with  gold 
provided  a  fund  which,  in  an  emergency,  the  Govern- 
ment might  utilize  by  the  issuance  of  paper  money. 
About  a  decade  before  this  time,  however,  Germany,  in 
common  with  some  of  the  other  governments  of  Europe, 
had  embarked  upon  a  new  policy  with  respect  to  the 
gold  stock  of  the  country.  This  was  that  the  gold  should 
be  accumulated  and  held  by  the  great  central  banking 
institution  of  the  country,  which  should  then  issue  the 
necessary  media  of  exchange  in  the  form  of  bank  notes. 
In  accordance  with  this  view  an  act  of  1906  had  author- 
ized the  issue  of  notes  of  the  Reichsbank  in  denomina- 
tions of  50  and  20  marks,  the  lowest  previous  denomina- 
tion having  been  fixed  at  100  marks.  Three  years  later 
the  bank  notes  were  made  full  legal  tender.  Imperial 
Treasury  notes  {Reichskassenscheine)  were  also  placed 
in  circulation  in  denominations  of  ten  and  five  marks. 
As  a  result  of  the  issue  of  these  forms  of  paper,  gold 
tended  to  accumulate  in  the  Reichsbank,  which  was  able 
to  increase  its  reserve  from  $258,000,000  in  July,  1911, 
to  $339,000,000  in  July,  1914. 

It  would  appear  from  recent  disclosures  that  Germany 
was  prepared  to  force  the  issue  in  1913,  but  was  pre- 
vented from  doing  so  at  that  time  by  the  refusal  of 
Italy  to  join  Germany  and  Austria-Hungary  in  an 
offensive  war.  The  burden  of  the  additional  military 
expenditures  and  the  impending  exactions  of  the 
Wehrheitrag  made  the  Junkers  prefer  actual  war,  from 

23 


WAR  COSTS  AND  THEIR  FINANCING 

which  they  expected  to  derive  a  profit,  to  the  costs  of 
an  unproductive  armament.  The  militarists,  who  could 
hardly  be  restrained  in  1911  and  1913,  were  completely 
out  of  hand  in  1914.  The  murder  of  the  Archduke 
Franz  Ferdinand  at  Serajevo  on  June  28,  1914,  afforded 
the  excuse  for  a  premeditated  attack. 

Strange  as  it  seems  to-day,  looking  back  over  the 
years  of  preparation  on  the  part  of  Germany,  of  her 
sword-rattling  and  then  dimly  understood  mutterings 
of  world  domination,  the  war  undoubtedly  came  as  a 
surprise  to  the  rest  of  the  world.^  The  signs  of  the 
impending  conflict  were  ciear,  but  they  were  unheeded. 
The  most  effective  answer  to  Germany's  off-repeated 
charge  that  the  war  was  begun  by  her  enemies  and  that 
England  especially  was  responsible  for  initiating  it,  is 
to  be  found  in  the  financial,  as  well  as  in  the  military 
unpreparedness  of  Great  Britain.  England  had  given 
hostages  to  peace  in  her  great  foreign  investments. 
London  was  the  center  of  a  delicately  organized 
mechanism  for  transacting  and  financing  international 
trade.  Any  disturbance  of  these  complicated  economic 
and  financial  relations  would  have  more  serious  conse- 
quences to  Great  Britain  than  to  any  other  country. 
British  investments  abroad  were  estimated  at  about 
$20,000,000,000,  the  annual  return  upon  which  amounted 
to  some  $1,000,000,000.  The  investment  of  British  capi- 
tal in  foreign  countries  was  estimated  to  amount  on* the 


^"In  August,  1914,  the  shock  came  upon  the  world's  oreat 
financial  markets  with  as  complete  a  violence  and  suddenness  as 
it  is  possible,  in  an  event  of  such  immense  importance,  to  imagine 
...  it  is  probable  that  no  other  war  in  modern  times  —  with 
the  possible  exception  of  the  Franco- Prussian  War  of  1870 
—  has  taken  the  great  financial  communities  so  completely  off 
their  guard."     (A.  D.  Noyes,  Financial  Chapters  of  the  War,  p. 


24 


READJUSTMENTS  AT  OUTBREAK  OF  WAR 

average  to  about  $800,000,000  annually.  As  a  result 
of  the  interest  paid  to  her  upon  investments  abroad 
and  the  payments  for  the  services  of  her  ships  and 
banking  and  insurance  institutions,  imports  into  Great 
Bjitain  greatly  exceeded  her  exports.  In  the  year  1913 
the  excess  of  imports  over  exports  amounted  to 
$670,000,000,  which  represented  the  payment  for  capital 
and  services  by  the  rest  of  the  world.  As  a  creditor 
nation  on  the  vastest  scale,  it  would  seem  that  Britain 
had  more  to  lose  by  a  world  war  than  any  other  nation. 
France,  like  England,  was  also  a  creditor  nation  on  a 
large  scale  and  had  extensive  investments  in  Russia, 
the  Near  East,  and  South  America.  The  excess  of 
French  merchandise  imports  over  exports  for  the  year 
1913  amounted  to  about  $420,000,000.  During  the  first 
six  months  of  1914  France  had  loaned  large  sums  to 
Greece,  Turkey,  and  Serbia.  The  financial  relations 
between  France  and  most  of  the  other  countries  of 
Europe  were  so  intimate  and  so  complicated  that  any 
break  would  J^e  sure  to  prove  disastrous.  France  had 
already  been  hard  hit  by  the  two  Balkan  wars  because 
of  her  large  loans  to  Balkan  states,  and  she  was  at 
this  time  primarily  interested  in  the  restoration  of  peace 
and  prosperity  in  that  section  of  Europe.  Moreover, 
the  financial  situation  itself  in  France  was  unsatisfac- 
tory in  the  early  part  of  1914.  The  settlement  of 
expenses  in  Morocco,  the  introduction  of  the  three-year 
service  law  in  response  to  Germany's  enlargement  of 
her  army,  and  an  increase  in  the  navy  had  imposed  new 
burdens  which  led  to  repeated  deficits.  To  meet  these 
deficiencies  a  new  internal  loan  of  $180,000,000  was 
authorized  by  an  act  of  June  30,  1914.  The  issue  of 
this  loan  should  of  itself  absolve  France  from  suspicion 
as  instigator  of  the  war, 

25 


WAR  COSTS  AND  THEIR  FINANCING 

In  Russia  the  fiscal  situation  in  1914  was  sound.  A 
period  of  industrial  expansion  had  begun  after  the  war 
with  Japan,  especially  in  oil  production,  and  industrial 
activity  gave  a  firm  foundation  for  the  State  finances. 
For  several  years  the  budget  had  shown  a  surplus.  Not 
only  this,  but  the  Treasury  had  been  able  to  reduce 
the  Government  debt  by  about  $100,000,000  in  the  years 
from  1910  to  1913,  and  had  also  accumulated  an  emer- 
gency reserve  fund  of  about  $250,000,000.  I^  1914 
there  had  been -accumulated  in  the  Bank  of  Russia  the 
largest  supply  of  gold  in  the  history  of  that  institution, 
amounting  to  $800,000,000,  which  was  probably  the 
largest  store  in  any  European  country.  On  the  other 
hand,  the  general  economic  situation  was  less  encourag- 
ing. The  large  loans  made  in  Europe,  particularly  in 
France,  had  probably  not  quickened  production  suffi- 
ciently to  meet  the  enhanced  interest  payments,^  which 
by  1914  were  not  far  short  of  $165,000,000  annually. 
Manufactures  and  mining  showed  some  development, 
but  agriculture,  the  mainstay  of  the  people,  made  little 
improvement.  In  the  summer  of  1914  the  harvest  was 
especially  poor,  owing  to  a  severe  drought.  The  gross 
crop  of  all  cereals  in  all  Russia  amounted,  on  the  aver- 
age for  the  four  years  1910-1913,  to  58,000,000  metric 
tons,  but  in  1914  it  was  only  53,000,000  metric  tons. 
The  banks  had  financed  the  producers,  and  as  the  war 
broke  out  in  mid-harvest,  they  were  hard  hit  by  the 
crop  failure. 

The  financial  condition  of  Austria-Hungary  in  1914 
was  probably  worse  than  that  of  any  other  nation  in 
Europe  with  the  possible  exception  of  Turkey.  Owing 
to  the  heaAy  costs  of  armament  and  pi'eparation  for  war, 

'  H.  M.  Hyndman,  "  The  Economic  Basis  in  India,"  Asia.  June, 
1919.  p.  534. 

26 


I 


READJUSTMENTS  AT  OUTBREAK  OF  WAR 

the  Government  had  for  years  faced  deficits  in  the 
annual  budgets.  The  credit  of  the  Empire  was  conse- 
quently seriously  impaired.  Nor  were  private  finances 
in  a  more  flourishing  condition.  Money  was  high, 
bankruptcies  were  frequent,  industries  were  suffering, 
and  unemployment  was  common.  jMoreover,  the  191-1 
Hungarian  harvest,  like  that  of  Russia,  had  proved 
almost  a  failure.  A  less  propitious  time  for  a  declara- 
tion of  war  could  hardly  have  been  selected,  but  it  is 
now  apparent  that,  assured  of  the  support  of  her 
stronger  ally,  Germany,  the  Dual  Monarchy  believed 
that  this  opportunity  of  crushing  Serbia  and  supplant- 
ing the  growing  influence  of  Russia  in  the  Balkans  was 
too  favorable  to  let  slip. 

Taking  the  situation  in  Europe  as  a  whole,  it  is  fairly 
obvious  that  in  spite  of  the  enormous  expenditures  on 
armament  and  the  enlargement  of  military  forces  on 
the  part  of  some  of  the  European  nations,  the  bankers, 
the  merchants,  and  the  man  in  the  street  regarded  war 
as  but  a  remote  possibility.  Unhappily,  the  interna- 
tionalism of  trade  and  flnance  did  not  act  as  a  deterrent 
as  many  had  fondly  hoped  it  would.  Imperialistic 
ambition  and  the  complete  subordination  of  government 
to  the  machinations  of  a  military  clique  were  sufficiently 
powerful  in  Central  Evirope  to  override  purely  commer- 
cial or  financial  considerations.  It  must  not  be  over- 
looked, however,  that  certain  economic  forces  were  at 
work  in  Germany  which  impelled  her  to  seek  what  her 
writers  termed  ' '  a  place  in  the  sun. ' ' 

The  assassination  of  the  Austrian  Archduke  occurred 
on  June  28,  1914.  "Within  two  weeks  there  was  a  serious 
fall  of  10  to  20  per  cent,  in  the  prices  of  stocks  in 
Vienna.    Upon  Austria-Hungary's  ultimatum  to  Serbia, 

27 


WAR  COSTS  AND  THEIR  FINANCING 

which  was  delivered  on  July  22  and  an  answer  to  which 
was  demanded  by  the  25th,  there  was  a  further  break 
in  stocks  in  Vienna,  which  this  time  extended  to  Berlin 
and  Paris.  In  both  Germany  and  France  the  conditions 
on  the  stock  exchanges  became  panicky.  When  Russia 
announced  on  July  25  that  she  would  protect  Serbia,  the 
panic  became  general.  Heavy  selling  of  securities  on 
foreign  account  took  place  in  the  New  York  market.  So 
serious  did  conditions  become  on  the  Continent  that  on 
July  27  the  exchanges  at  Vienna,  Budapest,  Brussels, 
and  Antwerp  were  closed.  On  the  28th  Austria- 
Hungary  declared  war  against  Serbia,  and  on  the  same 
day  the  exchanges  at  Montreal,  Toronto,  and  Madrid 
closed  their  doors,  to  be  followed  the  next  day  by  those 
of  Berlin  and  Petrograd.  Events  now  moved  so  rapidly 
that  it  was  impossible  for  the  market  to  adjust  itself. 
On  July  29  Russia  mobilized.  Two  days  later  Germany 
sent  her  ultimatum  to  France  and  the  next  day  started 
on  her  march  toward  Paris.  On  August  4  German 
troops  entered  Belgium  and  that  night  Great  Britain 
declared  war  on  Germany.  It  had  become  evident 
almost  from  the  first  that  the  conflict  could  not  be 
localized.  The  stock  exchanges  in  all  South  American 
countries  closed  on  July  30,  and-  in  Paris  the  coulisse 
M^as  forced  to  suspend  dealings.  On  Friday  morning, 
July  31,  the  London  Stock  Exchange  officially  closed, 
and  this  action  was  followed  a  few  hours  later  by  an 
announcement  that  the  New  York  Stock  Exchange  would 
not  open  for  business. 

It  is  evident  from  this  brief  chronology  that  Austria- 
Hungary's  ultimatum  to  Serbia  was  correctly  inter- 
preted by  the  stock  market,  and  that  her  declaration  of 
war,  in  spite  of  the  semi-official  declaration  "  that  she 
hoped  the  contest  would  be  localized,"  was  regarded  as 

28 


READJUSTMENTS  AT  OUTBREAK  OF  WAR 

the  first  step  in  a  world  conflict.  By  the  end  of  the 
mouth  of  July  all  the  important  markets  had  succumbed 
to  panic,  and  there  was  an  almost  complete  breakdown 
of  that  delicate  mechanism  of  international  exchange 
which  had  been  so  carefully  built  during  the  preceding 
years.  The  crisis  found  its  readiest  expression  in  the 
operations  on  the  stock  exchanges,  and  consequently 
these  institutions  were  the  first  to  cease  to  function  when 
steps  become  necessary  to  prevent  further  spread  of 
the  panic.  The  selling  of  stocks  in  general  was  due  to 
the  efforts  of  persons  having  debts  to  pay  or  wishing  to 
place  themselves  in  funds  to  realize  at  once  upon  their 
securities.  If  this  movement  had  continued  unre- 
strained, it  would  of  course  have  resulted  in  a  tremen- 
dous fall  in  the  prices  of  securities.  It  was  felt  that 
it  was  better  to  check  this  tendency  than  to  permit  the 
securing  of  funds  at  ruinous  discounts. 

As  London  was  the  world  center  of  international 
trade  and  finance,  the  events  in  that  city  assumed 
greater  importance  than  those  in  other  places  and  they 
have  consequently  received  most  attention.  To  carry 
on  this  international  trade  there  had  grown  up  in  Great 
Britain  a  complex  credit  organization  of  bill  brokers, 
discount  and  acceptance  houses,  and  joint-stock  banks, 
with  the  Bank  of  England  at  the  head.  Exporters  of 
commodities  from  foreign  countries  were  in  the  habit 
of  selling  their  goods  for  bills  of  exchange  drawn  on 
London.  To  secure  cash  immediately  the  exporter 
would  then  sell  his  draft  to  a  bill  broker  or  acceptance 
house  in  London.  These  in  turn  would  probably  borrow 
from  the  joint-stock  banks,  which  finally  looked  for 
assistance  to  the  Bank  of  England.  The  payment  of 
the  obligations  of  one  of  these  agencies  to  another  rested 
ultimately  upon  the  ability  of  the  buyer  of  the  foreign 

29 


WAR  COSTS  AND  THEIR  FINANCING 

goods,  against  whom  the  draft  was  drawn,  to  dispose 
of  his  goods  and  to  meet  his  obligations.  If  the  trans- 
action were  interrupted  at  any  point,  the  credit  organi- 
zation would  be,  temporarily  at  least,  thrown  out  of 
gear.  The  situation  was  complicated,  moreover,  by  the 
fact  that  the  joint-stock  banks,  which  held  deposits  call- 
able on  demand,  loaned  out  a  great  deal  of  their  money 
to  stock-exchange  dealers.  When  the  prices  of  securities 
began  to  fall,  they  started  to  call  in  loans,  an  act  which 
threatened  many  of  their  customers  with  bankruptcy. 
To  save  them  the  Government  arranged  with  the  Bank 
of  England  that.it  should  advance  to  lenders  on  stock- 
exchange  accounts  outstanding  on  July  29,  60  per  cent, 
of  the  value  of  the  securities  at  the  prices  of  that 
date. 

More  pregnant  of  danger,  however,  was  the  position 
of  the  acceptance  houses  which  had  discounted  foreign 
bills  with  the  joint-stock  banks  or  other  institutions. 
The  situation  that  developed  has  been  thus  clearly 
stated  by  Professor  Laughlin  :* 

It  suddenly  became  evident,  however,  that  the  drawers  of 
these  foreign  bills  could  not  remit  funds  on  a  very  large  scale 
to  meet  them  when  due.  If  the  drawers  could  not  pay,  the 
acceptance  houses  could  not ;  if  the  acceptance  houses  could 
not  pay,  then  these  bills,  which  formed  assets  in  the  discount 
houses  and  banks,  were  frozen.  It  is  estimated  that  the  sum 
total  of  bills  involved  amounted  to  about  $1,750,000,000;  of 
these  the  banks  held  from  $500,000,000  to  $625,000,000,  con- 
stituting perhaps  15  per  cent,  of  their  assets. 

In  such  a  crisis,  when  there  was  an  interruption  of 
the  shipment  of  goods  and  also  of  gold  with  which  the 
debts  could  have  been  met,  the  proper  thing  for  the 
banks  to  have  done  was  to  extend  further  accommodation 

'J.  L.  Laughlin,  Credit  of  the  Nations  (New  York,  1918),  p.  82. 

30 


READJUSTMENTS  AT  OUTBREAK  OF  WAR 

to  the  acceptance  houses  aud  brokers  in  order  to  tide 
them  over  the  period  of  panic  and  temporary  stoppage 
of  exchange.  The  banks,  however,  pursued  the  opposite 
policy  of  protecting  their  reserves  and  of  calling  in 
funds.  In  this  emergency  the  borrowing  public  was 
forced  to  turn  to  the  Bank  of  England,  and  the  conse- 
quent great  pressure  for  loans  from  that  institution 
drove  the  bank  rate  as  high  as  10  per  cent,  on  August  1. 

The  situation  was  further  complicated  by  the  fact 
that  Monday,  August  3,  was  a  regular  bank  holiday,  so 
that  the  end  of  the  previous  week  saw  the  people  who 
were  planning  expeditions  into  the  country  calling  upon 
the  banks  for  cash.  To  their  surprise  they  were  given 
only  10  per  cent,  in  gold  and  90  per  cent,  in  Bank  of 
England  notes,  the  lowest  denomination  of  which  ($25) 
was  inconveniently  large  for  ordinary  expenditures. 
This  led  to  a  rush  to  the  Bank  of  England  for  redemp- 
tion of  its  notes  in  gold,  the  demand  being  so  great  that 
long  queues  of  people  were  formed  outside  the  bank. 

As  a  result  of  these  various  demands  the  Bank  of 
England  lost  $80,000,000  in  gold  and  notes,  its  reserves 
being  thereby  depleted  to  less  than  $138,000,000.  In 
this  emergency  the  first  thing  to  do  was  to  gain  time. 
Three  extra  bank  holidays  were  declared,  which  post- 
poned the  opening  of  the  bank  until  Friday  morning, 
August  7,  and  gave  the  authorities  opporunity  to  pre- 
pare remedial  measures.  It  is  probably  incorrect  to 
say  that  there  was  a  panic,  but  there  was  need  for 
prompt  measures  to  relieve  the  money  stringency  and 
the  breakdown  of  credit.  The  measures  adopted  to 
remedy  the  situation  will  be  described  hereafter. 

In  France,  because  of  the  invasion  of  her  territory, 
the  shock  to  public  credit  was  probably  greater  than  in 
any  other  country  except  Belgium.     Although  France 

31    '^ 


WAR  COSTS  AND  THEIR  FINANCING 

did  not  have  the  widely  scattered  and  intricately  rami- 
fied international  trade  relations  which  Great  Britain 
possessed,  a  considerable  part  of  the  income  of  her 
people  was  derived  from  foreign  investments.  Many  of 
these  securities  were  unsalable,  even  at  panic  prices,  and 
the  banks  that  had  made  loans  upon  them  as  collateral 
were  unable  to  secure  payment  of  their  loans.  More- 
over, the  value  of  these  securities  as  collateral  for  loans 
declined  greatly.  The  invasion  by  the  Germans  of  the 
northeastern  section  of  France  lost  her  the  country's 
richest  coal  fields  and  those  districts  in  which  the  lead- 
ing textile  and  iron  industries  were  carried  on.  French 
industry  and  agriculture  were  also  struck  a  severe  blow 
by  the  withdrawal  from  economic  activity  of  practically 
all  the  able-bodied  men  as  a  result  of  the  general 
mobilization  order  of  August  1.  It  is  evident  that  in 
circumstances  like  these  it  is  immaterial  whether  one 
describes  the  resulting  conditions  as  those  of  panic  or 
not.  There  was  a  complete  breakdown  of  the  normal 
organization  of  industries  and  the  coordinate  credit 
structure.  In  France  also  immediate  and  far-reaching 
measures  were  necessary  to  protect  the  rights  of  both 
debtors  and  creditors  and,  so  far  as  possible,  to  provide 
means  for  the  continuance  of  necessary  economic 
activities. 

As  Russia  is  primarily  an  agricultural  country,  there 
did  not  exist  there  the  delicately  organized  mechanism 
of  credit  and  foreign  trade  such  as  had  been  developed 
in  England  and,  to  a  less  degree,  in  France  and  Ger- 
many. Consequently  the  disorganization  of  business  in 
Russia  was  not  so  complete  or  so  widespread.  The 
partial  failure  of  the  crops  had  already  involved  the 
banks,  whose  credit  was  strained  before  the  outbreak  of 
the  war.     Mobilization  came  after  harvest  throughout 

32 


READJUSTMENTS  AT  OUTBREAK  OF  WAR 

a  considerable  section  of  the  Empire,  and  it  was  there- 
fore not  so  serious  as  it  would  have  been  a  month  earlier. 
Still,  the  problems  were  similar  to  those  in  other  coun- 
tries, differing  only  in  degree,  and  to  meet  them  similar 
remedial  measures  were  adopted. 

In  the  field  of  finance,  as  in  military  details,  Germany 
had  made  all  possible  preparations  for  the  war,  and  she 
had  hoped  by  her  carefully  planned  measures  to  avoid  a 
shock  to  her  industries  and  credit  such  as  occurred  in  the 
other  belligerent  countries.  But  no  nation  carrying  on 
the  far-reaching  operations  of  trade  and  finance  in  which 
Germany  was  involved  before  the  war  could  suddenly 
cut  off  her  relations  with  the  outside  world  without 
feeling  the  shock  of  such  an  amputation.  Allusion  has 
already  been  made  to  the  panic  on  the  Berlin  Stock 
Exchange  and  the  closing  of  that  institution  on  July  29. 
There  occurred  in  Germany  a  phase  of  panic  that  was 
not  duplicated,  at  least  to  the  same  extent,  in  other 
countries;  there  were  runs  on  the  banks  by  frightened 
depositors.  On  a  single  day,  August  3,  the  Berlin 
savings  banks  lost  over  $230,000,000.  Hoarding  also 
took  place,  not  of  gold  merely,  but  also  of  notes  and 
silver.  The  resulting  shortage  of  money  was  met  by  the 
issuance  of  Imperial  Treasury  notes  for  10  marks  and 
of  loan  office  notes  for  one  and  two  marks.  As  in  the 
other  belligerent  countries,  the  calling  of  the  able-bodied 
men  to  the  colors  crippled  industry,  but  the  disturbance 
was  probably  not  so  great  in  Germany  as  in  the  others 
because  of  her  carefully  worked-out  plans  for  handling 
this  problem. 

The  situation  in  Austria-Hungary  was  not  dissimilar 
from  that  in  the  other  warring  countries,  due  allowance 
being  made  for  differences  in  conditions.  The  stock 
exchanges  were  closed,  a  moratorium  was  declared,  and 

33 


WAR  COSTS  AND  THEIR  ib^INANClNG 

specie  payments  were  suspended.  The  financial,  indus- 
trial, and  commercial  world  of  the  Dual  Monarchy  was 
disturbed  by  the  same  shocks  that  affected  other  coun- 
tries, and  it  suffered  the  same  effects. 

If  the  foregoing  analysis  is  correct,  it  is  clear  that 
an  immediate  difBculty  brought  about  by  the  outbreak  of 
the  World  War  was  the  breakdown  of  credit,  both 
national  and  international.  The  production  and  move- 
ment of  goods  having  been  interrupted,  the  credit  trans- 
actions based  upon  these  primary  operations  were  dis- 
organized. There  was  not  so  much  a  distrust  of  credit 
as  there  was  a  complete  stoppage  of  ordinary  trans- 
actions. Since  the  movement  of  goods  was  stopped, 
payments  based  upon  them  could  not  be  made  when 
due.  In  these  circumstances  the  first  necessity  was  the 
further  extension  of  credit.  But  more  than  that  was 
needed.  Since  the  ordinary  credit  machinery  had 
broken  down,  a  larger  amount  of  the  other  media  of 
exchange  must  be  at  once  supplied.  At  the  same  time 
the  reser%^s  of  the  banks,  especially  the  gold  holdings 
of  the  great  central  institutions,  had  to  be  safeguarded 
and  their  dissipation  prevented.  To  meet  these  various 
aspects  of  the  situation  three  different  types  of  remedy 
were  adopted,  the  emphasis  being  differently  placed 
in  the  various  countries. 

(1)  Moratoria. —  Although  the  moratorium  was  un- 
familiar to  American  business  men,  it  was  a  device  which 
had  fi-equently  been  made  use  of  in  Europe;  it  was 
generally  adopted  in  France  during  the  Napoleonic 
wars.  The  situation  in  1914  was  so  unparalleled  and 
tile  derangement  of  business  so  universal  that  the 
moratorium  was  adopted  by  practically  all  the  belliger- 

34 


READJUSTMENTS  AT  OUTBREAK  OF  WAR 

ent  nations  as  well  as  by  a  large  number  of  neutrals. 
By  the  end  of  1913,  19  nations  had  resorted  to  this  ex- 
pedient. Briefly  defined,  the  moratorium  is  an  act  which 
postpones  the  date  on  which  debts  have  to  be  mt3t.  The 
principle  of  the  moratoria  of  1914  was  the  same  in  all 
cases,  tliough  the  period  of  postponement  differed  from 
country  to  country.  In  Great  Britain  the  original 
proclamation  of  August  2,  known  as  the  Postponement 
of  Payments  Act  (4  &  5  Geo.  V,  Ch.  11),  declared  a 
moratorium  of  one  month,  which  was  later  extended  to 
October  4.  It  affected  an  enormous  volume  of  business 
and  is  estimated  to  have  stopped  payment  on  credit 
instruments  having  a  face  value  of  $2,000,000,000. 
Referring  to  this  Act,  Lloyd  George  said  in  a  speech 
in  the  House  of  Commons  on  November  27,  1914 :  ' '  We 
first  declared  a  moratorium,  a  limited  moratorium,  so 
as  to  give  us  time  to  look  around."  There  has  been 
much  discussion  of  the  wisdom  of  this  course.  At  the 
time  it  was  pointed  to  by  the  Germans  as  an  evidence 
of  the  breakdown  of  the  English  credit  system.  But 
in  view  of  the  general  demoralization  of  foreign  trade 
and  exchange  the  world  over,  it  would  have  been  impos- 
sible to  have  insisted  upon  the  immediate  settlement  of 
debts.  The  postponement  of  settlement  for  a  reasonable 
time  both  enabled  the  debtor  to  make  satisfactory  pro- 
vision for  ultimate  payment  and  tended  to  restore 
confidence. 

The  Government  arranged  with  the  Bank  of  England 
that  it  should  discount  all  approved  bills  of  exchange 
accepted  before  August  4  and  continue  them,  if  unpaid 
at  maturity,  until  one  year  after  the  war  at  a  rate  two 
per  cent,  higher  than  the  bank  rate.  At  the  same  time 
the  Bank  proceeded  boldly  to  discount  new  acceptances. 
This  arrangement  greatly  relieved  the  exchange  market 

35 


WAR  COSTS  AND  THEIR  FINANCINa 

l)ut  imposed  upon  the  Bank  a  heavy  burden  and  exposed 
it  to  possible  ultimate  loss.  In  this  emergency  the 
unprecedented  step  was  taken  by  the  Government  of 
guaranteeing  the  pre-moratorium  bills  of  exchange,  with 
the  expectation  that  any  resultant  loss  would  be  charged 
up  to  war  costs.  It  has  been  estimated  that  the  total 
current  liability  on  pre-moratorium  bills  of  exchange 
amounted  to  $3,000,000,000,  of  which  about  $2,250,000,- 
000  was  discounted  at  the  Bank  of  England  under  this 
Government  guarantee.  These  bills,  however,  have  been 
met  at  maturity,  and  it  is  said  that  the  ultimate  loss, 
which  can  only  be  determined  one  year  after  the  conclu- 
sion of  peace,  may  not  exceed  $150,000,000. 

The  French  Government  at  the  outbreak  of  war  post- 
poned for  one  month  the  payment  of  all  negotiable 
instruments  maturing  between  July  31  and  August  31 
provided  they  had  been  endorsed  prior  to  August  4. 
This  was  wider  in  its  application  than  the  British  Act 
since  it  included  sight  drafts  as  well  as  long  bills. 
General  use  was  made  of  the  privilege  granted.  The 
moratorium  was  later  extended  to  other  liabilities,  and 
its  termination  was  postponed  from  time  to  time,  so 
that  in  some  applications  it  continued  throughout  the 
war.^    The  Bank  of  France  carried  most  of  the  burden 

'^  One  of  the  curious  effects  of  the  moratorium  in  France  was 
observable  in  the  case  of  house  rentals.  Under  it  tenants  were 
absolved  from  the  obligation  of  paying  rent.  The  absolution  was 
universal;  neither  rich  nor  poor  had  to  pay.  House  property  is 
a  favorite  form  of  investment  of  thrifty  Frenchmen,  and  the 
anomaly  thus  introduced  by  the  moratorium  cut  off  the  total 
income  ot  thousands  of  "  house-poor  "  French,  in  some  cases  the 
owners  becoming  charwomen  to  the  non-rent-jiaying  tenants.  The 
moratorium  also  established  the  obligation  of  extending  the  leases, 
written  or  unwritten,  at  the  same  rental  for  a  period  equal  to  the 
duration  ol  the  war.  To  offset  this  burden  on  the  houseowner. 
however,  the  Senate  and  Chamber  provided  that  in  communes  of 
less  than  10,000  inhabitants,  when  the  income  thus  cut  off  did 
no'-,  exceed  5,000  francs,  the  owner  was  entitled  to  an  indemnity 

36 


READJUSTMENTS  AT  OUTBREAK  OF  WAR 

o±*  these  obligations,  although  it  was  not,  like  the  Bank 
of  England,  guaranteed  against  loss  by  the  Government. 
The  total  pre-moratorium  paper  at  the  Bank  of  France 
amounted  in  August,  1914,  to  almost  $900,000,000.  This 
amount  had  been  reduced  by  December,  1915,  to 
$367,000,000,  and  by  June,  1919,  to  $206,000,000.  It 
is  reasonable  to  expect  that  the  final  losses  of  the  Bank 
of  France  will  be  reduced  to  a  manageable  sum. 

The  methods  adopted  in  other  countries  were  similar 
to  those  already  described.  In  Russia  a  moratorium  was 
immediately  declared  for  one  month,  covering  bills  of 
exchange  falling  due  after  July  30;  this  was  later 
extended  from  time  to  time.  Similar  measures  were 
taken  in  Belgium,  Italy,  Bulgaria,  Austria,  Turkey,  and 
a  number  of  neutral  countries. 

Germany  boasted  that  she  had  avoided  the  opprobrium 
of  resort  to  a  moratorium.  This  claim,  however,  can  be 
admitted  only  with  reservations.  By  a  decree  of  the 
Bundesrat  of  August  6,  1914,  the  term  for  the  payment 
of  bills  and  checks  was  extended  one  month,  and  this 
was  later  extended  from  time  to  time  until  the  follow- 
ing May.  The  civil  courts  were  also  empowered  to 
extend  the  time  for  the  payment  of  mortgages,  and  the 
pressure  of  public  opinion  forced  creditors  to  be  lenient 
in  the  collection  of  other  debts.  It  is,  therefore,  incor- 
rect to  say  that  there  was  no  moratorium  in  Germany. 
It  is  not  necessary  to  press  this  point,  however,  for  it 
must  be  admitted  that  the  measures  taken  in  Germany 
to  relieve  the  situation  were  very  different  from  the 
moratoria  adopted  in  other  countries.  The  evil  which 
the  moratorium  sought  to  meet  was  the  locking  up  of 
securities,  the  freezing  of  hitherto  liquid  assets.     The 

(from  the  o-overnment )  of  50  per  cent,  of  his  loss;  in  communes 
of  over  10.000  inhabitants  the  maximum  indemnity  to  the  owner 
was  8,000  francs,  and  in  Paris  it  was  10,000  francs. 

37 


WAR  COSTS  AND  THEIR  FINANCING 

policy  followed  in  Germany  was  to  render  the  assets 
licjuid  again  by  providing  institutions  which  should  at 
once  discount  not  only  securities  and  commercial  papers 
but  even  merchandise.  The  Reichsbank  was  first  of  all 
empowered  to  lend  freely.  The  discounts  rose  from 
$200,000,000  on  July  23,  1914,  to  $1,152,000,000  on 
August  15,  although  it  should  be  pointed  out  that  this 
sum  included  advances  to  the  Government,  which 
amounted  for  the  first  two  months  of  the  war  to  about 
$500,000,000.  New  credit  institutions  known  as  "  loan 
offices  "  (Darlehenskassen)  were  organized  to  facilitate 
loans  and  extend  the  credit  necessary  to  continue  busi- 
ness. The  necessity  of  postponing  the  time  of  payment 
was  removed  by  making  large  issues  of  paper  money  on 
the  basis  of  practically  any  security  or  commodity  that 
could  be  pledged  at  a  bank.  The  provision  of  means  of 
payment  did  not  work  any  magic  in  the  ultimate  good- 
ness of  debts  which  were  met  in  this  fashion.  The  day 
of  reckoning  was  postponed  as  truly  as  if  by  moratorium. 
When  one  takes  into  account  the  efl'ects  in  Germany  of 
the  issue  of  paper  money,  the  inflation,  the  rise  of 
prices,  and  the  further  derangement  of  foreign  exchange, 
one  must  conclude  that  the  method  of  moratorium  was 
much  more  scientific  and  greatly  to  be  preferred. 

(2)  Safeguarding  gold  reserves. —  A  second  series  of 
measures,  which  were  more  or  less  common  to  all  the 
belligerents,  had  to  do  with  the  safeguarding  of  the 
stock  of  gold  within  the  country.  In  most  of  the  Con- 
tinental countries  the  major  portion  of  the  stock  of  gold 
was  in  the  possession  of  the  central  bank  of  issue.  Conse- 
quently one  of  the  first  acts  of  Government  was  to  relieve 
the  central  bank  of  the  necessity  of  redeeming  notes 
in  gold  —  that  is,  to  suspend  specie  payment.    This  was 

38 


READJUSTMENTS  AT  OUTBREAK  OF  WAR 

done  in  the  case  of  the  Bank  of  France  (August  5),  of 
the  Reichsbank  of  Germany  (August  1),  of  the  Bank  of 
Russia  (July  27/August  9),  and  of  the  Imperial  Austro- 
Hungarian  Bank  (August  5).  By  this  means  the  dissi- 
pation of  the  gold  reserves  of  the  countries  was  pre- 
vented and  these  were  held  intact  for  the  period  after 
the  war  when  normal  relations  among  nations  would  be 
resumed.  In  England  the  suspension  of  the  Bank  Act 
of  1844  was  authorized  by  the  decree  of  August  6,  but 
the  Bank  of  England  did  not  in  fact  take  advantage  of 
the  permission  to  issue  its  notes  without  cover  beyond  the 
legal  reserve.  The  peculiar  position  held  by  England 
in  the  world  of  international  trade  and  finance  made  it 
particularly  desirable  that  there  should  be  no  interfer- 
ence with  the  free  movement  of  gold  into  and  out  of 
that  country.  England  was  hard  put  to  it  before  the 
war  was  over  to  maintain  specie  payments  in  fact  as  well 
as  in  name,  but  by  one  means  or  another  she  was  able 
to  preserve  the  form  at  least  until  after  the  war.^  This 
was  an  achievement  compared  with  which  the  avoidance 
of  a  moratorium,  real  or  apparent,  in  Germany  was  a 
mere  bagatelle. 

The  stocks  of  gold  in  the  central  banks  of  the  five 
principal  belligerent  countries  in  July,  1914,  and  on 
December  31  of  each  year  following  are  given  below.'^ 
Not  only  did  these  central  banks  with  the  exception 
of  that  of  Austria-Hungary  maintain  their  reserves,  but 
with  the  same  exception  they  increased  them.  One  of 
the  most  unprecedented  and  unpredictable  occurrences 
of  the  war  was  the  surrender  by  the  citizens  of  these 

*  An  embargo  was  finally  placed  on  the  export  of  gold  by  an 
Order-in-Council  of  ]March  20.  1019,  to  become  efTective  after 
April  1. 

'  Compiled  from  bank  returns  in  Federal  Reserve  Bulletin, 
March,  1920,  p.  334. 

39 


WAR  COSTS  AND  THEIR  FINANCING' 


Gold  Reserves  in  Central  Banks  of  Belligerents 

{In  millions) 


Year 

England 

France 

Russia 

Germany 

Austria- 
Hungary 

July.  1914 .  .  . 
Dec.  31,  1914. 

1915 

1916.- 

1917 

1918 

1919 

$190 
338 
251 
264 
284 
384 
444 

$830 
799 
968 
653 
640 
664 
695 

$800 
803 
831 
758 
667 

$340 
499 
582 
600 
573 
538 
259 

$255 

214 

139 

59 

53 

53 

countries  of  their  hoarded  gold  to  the  banks  in  exchange 
for  bank  notes,  even  in  some  cases  after  the  latter  had 
begun  to  depreciate.  Appeals  were  made  to  the  people 
to  exchange  their  gold  for  bank  notes,  and,  to  prevent 
the  exportation  of  gold,  laws  were  passed  prohibiting  it 
entirely  or  placing  such  transactions  entirely  under  the 
control  of  the  central  bank.  Germany  was  the  first 
country  to  make  a  systematic  and  determined  effort  to 
increase  the  gold  fund  in  the  Reichsbank.  Acts  were 
passed  penalizing  transactions  in  gold  at  a  premium  and 
prohibiting  its  exportation.  The  publication  of  rates 
of  foreign  exchange  was  also  forbidden.  It  was  not 
enough,  however,  to  keep  the  money  in  the  country;  it 
must  be  brought  to  the  Reichsbank  itself.  To  secure 
this  result  a  campaign  was  carried  on  among  the  people 
to  induce  them  to  exchange  gold  or  coin  or  jewelry  for 
bank  notes.  A  good  account  of  this  campaign  was  given 
by  Ambassador  Gerard  in  a  speech  to  the  New  York 
Chamber  of  Commerce:^ 

Signs  were  hung  up  in  the  street  cars  saying,  "  ^e  who 
koops  back  a  gold  piece  injures  the  Fatherland."     Soldiers 
^'Sew  York  Times  Magazine,  July  15,  1917,  p.  14. 

40' 


READJUSTMENTS  AT  OUTBREAK  OF  WAR 

were  given  a  two  days'  leave  of  absence  if  they  would  produce 
a  20-mark  gold  piece.  For  that  they  were  given  a  20-mark 
note,  just  as  good  as  the  gold  in  Germany.  School  children 
if  they  produced  a  10-niark  gold  piece  werj  given  10  marks  in 
paper  and  a  half  holiday.  In  many  of  the  theatres  if  a  per- 
son paid  for  his  ticket  in  gold  he  would  receive  a  ticket  good 
for  another  day. 

By  February,  1915,  the  gold  reserve  of  the  Reichsbank 
had  been  increased  to  about  $540,000,000,  and  by  May, 
1917,  when  the  highest  point  was  reached,  the  reserve 
had  been  brought  up  to  about  $6-40,000,000.  Part  of 
this,  however,  was  obtained  from  Belgium  and  from  the 
banks  of  Austria-Hungary  and  Turkey. 

A  similar  procedure  was  followed  in  France.  Exports 
of  gold  except  by  the  Bank  of  France  were  forbidden. 
An  appeal  was  also  made  to  the  people  in  July,  1915, 
following  the  example  of  Germany,  to  exchange  gold 
for  notes  at  the  Bank.  By  October  about  $160,000,000 
had  been  added  to  the  gold  reserves,  and  by  December, 
1915,  these  amounted  to  over  $1,000,000,000.  Over 
$400,000,000  in  gold  was  shipped  abroad  by  France 
and  used  as  the  basis  for  credits ;  title  thereto  remained 
with  the  Bank,  however,  and  the  exported  gold  was  car- 
ried as  *'  gold  held  abroad  "  in  its  weekly  statements. 
By  the  end  of  1918  its  gold  reserves  at  home  and  abroad 
totalled  over  $1,095,000,000. 

In  Russia  even  stronger  inducements  were  held  out 
to  the  people  to  exchange  gold  for  notes  in  return  for  a 
premium.  This  resulted  in  considerable  sums  being 
surrendered  to  the  Bank  of  Russia.  Because  of  Russia's 
necessity  of  making  payment  for  munitions  to  England 
the  Bank  shipped  gold  to  London,  beginning  with 
$40,000,000  in  November,  1914,  but  this  was  more  than 
made  good  again  by  gathering  in  gold,  so  that  by  the 

41 


WAR  COSTS  AND  THEIR  FINANCING 

end  of  1915  the  reserves  stood  higher  than  they  were 
before  the  war.  The  necessity  for  maintaining  foreign 
exchange  by  shipments  of  gold  only  partly  nullified  the 
effect  in  the  case  of  Russia  oi:  the  collection  from  the 
people. 

In  contradistinction  to  most  of  the  other  countries, 
the  reserves  of  the  central  banks  of  Austria-Hungary 
and  of  Turkey  showed  a  steady,  and  at  first  blush  an 
inexplicable,  decline.  This  was  said  by  an  angry  deputy 
in  the  lower  house  of  the  Austrian  Reichsrath  to  be 
causally  connected  with  the  increase  in  the  reserves  of 
the  German  Reichsbank.  Certain  it  is  that  the  two 
phenomena  were  synchronous.  German  Treasury  bills 
were  furnished  to  both  Autria-IIungary  and  Turkey  in 
exchange  for  gold  from  their  central  banks  which  was 
transferred  to  the  Reichsbank  in  spite  of  their  laws 
against  the  export  of  gold.  With  these  Treasury  bills 
Austria-Hungary  and  Turkey  were  enabled  to  purchase 
the  munitions  and  supplies  furnished  by  Germany.  It 
is  evident  that  the  gold  reserves  would  not  last  long  in 
the  face  of  the  enormous  expenditures  that  were  neces- 
sary; as  a  matter  of  fact,  they  were  pretty  well 
exhausted  by  the  end  of  1915. 

(3)  Issue  of  additional  money. —  Because  of  the 
temporary  breakdown  of  the  credit  system  and  of  the 
demand  for  immediate  means  of  payment  and  media 
of  exchange,  it  was  found  necessary  in  practically  every 
belligerent  country  immediately  after  the  outbreak  of 
war  to  provide  additional  money.  In  some  cases  this  was 
issued  directly  by  the  Government,  but  in  most  instances 
the  duty  of  providing  the  needed  media  of  exchange 
was  entrusted  to  banks  of  issue.  In  time  of  panic,  such 
as  then  prevailed,  there  is  never  enough  actual  cash  to 

42 


READJUSTMENTS  AT  OUTBREAK  OF  WAR 

meet  the  demands  of  the  people.  Failure  of  the  ordinary 
credit  devices  and  methods  throws  a  large  part  of  the 
demand  for  media  of  payment  to  actual  cash.  Add  to 
this  the  withdrawal  of  considerable  sums,  as  a  result 
of  hoarding  by  frightened  and  thoughtless  people,  and 
there  is  created  a  real  money  stringency  which  can  be 
met  only  by  the  issue  of  additional  forms  of  currency. 
In  England  there  was  a  considerable  withdrawal  of 
gold  from  the  Bank  of  England,  and  the  joint-stock 
banks  in  order  to  protect  themselves  hoarded  their  own 
stocks  of  gold.  This  bad  example  was  followed  by  the 
people,  and  a  difficult  situation  resulted.  In  this  emer- 
gency the  Currency  and  Bank  Note  Act  of  August  6, 
1914,  was  passed,  which  authorized  the  Treasury  to 
suspend  the  Bank  Act,  that  is,  it  provided  that  banlcs 
of  issue  should  be  indemnified  against  any  liability  on 
the  ground  of  excess  of  issues  after  August  1.  As  the 
Bank  of  England  did  not  take  advantage  of  this  per- 
mission, it  has  been  claimed  by  many  writers  that  no 
formal  suspension  of  the  Bank  Act  in  fact  took  place, 
but  that  the  machinery  only  was  created.  In  fact  the 
Bank  Act  suspension  was  rendered  unnecessary  because 
the  Government  itself  under  the  Currency  and  Bank 
Note  Act  undertook  the  issue  of  paper  money  direct.  The 
Treasury,  acting  under  its  authority,  issued  one-pound 
and  10-shilling  notes  ($5  and  $2.50)  wdiich  were  given 
legal  tender  quality.  Postal  money  orders  were  made 
legal  tender  by  the  Act,  in  order  to  meet  necessities  at 
once  in  all  parts  of  the  Kingdom,  but  this  provision  was 
ended  on  February  3,  1915.  The  Government  currency 
notes  were  issued  through  the  Bank  of  England  as  the 
agent  of  the  Treasury  to  the  banks  up  to  a  maximum 
limit  of  20  per  cent,  of  thx^ir  liabilities  on  deposits  and 
covered  accounts.  The  Treasury  was  secured  by  making 
the  issues  a  prior  lien  on  the  assets  of  the  bank.    Inter- 

43 


WAR  COSTS  AND  THEIR  FINANCING^ 

est  was  charged  the  banks  at  the  current  rate,  and  when 
advances  were  repaid,  the  sums  w^ent  to  a  separate  fund 
in  the  Bank  of  England  called  the  Currency  Note 
Redemption  Fund.  This  Fund  remained  at  about 
$1-42,000,000.  The  amounts  taken  by  the  banks  were 
comparatively  small.  Although  under  the  law  they 
could  have  taken  as  much  as  $1,125,000,000,  they  actu- 
ally took  only  $65,000,000.^  Subsequently,  however,  the 
volume  of  the  currency  notes  expanded  greatly  by  direct 
issue  in  payment  of  war  contracts,  etc.  By  August  26, 
1915,  the  amount  outstanding  was  $252,000,000;  by 
November  14,  1917,  it  had  risen  to  $956,000,000,  and  by 
January  1,  1919,  to  $1,616,200,000. 

The  issue  of  these  notes  marked  a  new  departure  in 
British  finance,  for  it  was  the  first  time  that  the  British 
Government  had  resorted  to  an  issue  of  paper  money. 
There  seems  to  be  no  doubt  that  in  the  first  panic  days 
after  the  outbreak  of  war  there  was  a  lack  of  actual 
money  to  meet  immediate  demands.  When  it  is  recalled 
that  the  lowest  denomination  of  Bank  of  England  notes 
is  $25  and  that  there  was  a  disposition  to  hoard  the 
gold  which  made  up  the  larger  amount  of  the  coin  in 
circulation,  a  justification  can  be  found  for  the  issue 
of  these  currency  notes  by  the  Government.  The  criti- 
cism may  be  made,  however,  that  although  they  were 
issued  as  an  emergency  measure,  they  were  continued 
in  existence  during  the  whole  course  of  the  war.  Not 
only  that,  but  as  time  went  on  the  Government  made 
increasing  use  of  them  to  meet  emergencies.  All  the 
objections  that  can  be  urged  against  government  paper 
money  may,  of  course,  be  directed  against  these  issues, 
and  as  a  matter  of  fact  they  were  urged  both  in  Great 
Britain  and  elsewhere.    In  all  fairness,  however,  it  must 

®  Hartley  Withers,  The  War  and  Lombard  Street,  p.  83. 

44 


READJUSTMENTS  AT  OUTBREAK  OF  WAR 

be  pointed  out  that  these  notes  were  not  ordinary  fiat 
money  based  purely  on  the  credit  of  tlie  Government; 
they  were  convertible  and  backed  up  by  a  gold  reserve, 
although  as  the  issues  increased  this  became  painfully 
small.  As  in  the  case  of  all  excessive  issues,  whether  of 
government  paper  money  or  bank  notes  or  deposit  cur- 
rency, the  fact  was  reflected  in  higher  prices,  and  so 
far  as  these  notes  contributed  to  that  end,  they  must 
be  condemned.  Had  provision  been  made  for  the  issue 
of  emergency  notes  of  the  same  denominations  by  the 
Bank  of  England,  in  response  to  commercial  demands 
rather  than  to  Treasury  needs,  resort  to  government 
paper  money  might  have  been  avoided. 

In  France  the  paper  currency  was  supplied  by  the 
Bank  of  France,  which  possessed  a  monopoly  of  note 
issues.  These  notes  were  protected  by  the  general  assets 
of  the  Bank,  which  held  enormous  gold  reserves  amount- 
ing generally  to  75  per  cent,  of  the  outstanding  issues 
and  to  over  50  per  cent,  of  the  note  issues  and  deposits 
combined.  There  was  a  legal  limit  to  the  Bank's  issues, 
but  as  this  was  always  raised  whenever  the  actual  issues 
approached  dangerously  near  to  this  point,  it  may  safely 
be  said  that  there  was  no  real  limit  other  than  that 
dictated  by  good  banking.  The  outstanding  bank 
notes  in  circulation  amounted  on  July  24,  1914,  to 
$1,800,000,000.  By  October  1,  1914,  they  had  been 
raised  to  $1,859,800,000;  by  the  end  of  December  they 
had  passed  $2,000,000,000 ;  during  1915  they  gradually 
increased  until  they  reached  $2,800,000,000;  and  the 
year  1916  saw  the  issues  amount  to  $3,400,000,000,  1917, 
to  $4,468,000,000,  and  1918,  to  $6,050,000,000.  The  first 
big  jump  was  made  in  response  to  the  demand  for  actual 
cash  which  arose  immediately  upon  the  outbreak  of 
war.    The  Bank  was  very  liberal  in  granting  loans  and 

45 


WAR  COSTS  AND  THEIR  FINANCING 

also  in  making  advances  to  the  Government.  As  the 
Government  demand  was  a  non-commercial  one,  the 
issue  of  notes  to  meet  it  was  not  made  in  response  to  a 
legitimate  business  expansion,  and  it  thus  resulted  in  a 
real  inflation  of  the  currency  with  its  undesirable  effects 
of  high  prices,  etc.  The  greater  part  of  the  issues  was 
made  to  meet  the  needs  of  the  situation  as  they 
developed.  With  the  suspension  of  specie  payments  gold 
quickly  disappeared  from  circulation,  and  the  resulting 
lack  of  currency  was  met  by  the  issue  of  bank  notes 
in  denominations  of  5  and  20  francs  which  had  been 
prepared  to  meet  such  an  emergency.  The  Bank  also 
paid  out  about  half  of  its  silver  coin,  consisting  of  five- 
franc  pieces.  In  the  southwestern  part  of  France  local 
chambers  of  commerce  issued  one-franc  and  half-franc 
notes  to  meet  the  need  for  small  change. 

Russia  pursued  much  the  same  policy  as  had  been 
followed  in  France.  The  legal  limit  upon  the  note 
issues  of  the  Bank  of  Russia  was  raised  on  July  27/ 
August  9,  1914,  to  $600,000,000  from  the  pre-war  limit 
of  $800,000,000.  On  March  17/30,  1915,  it  was  increased 
to  $1,100,000,000;  on  August  22/September  4,  1915, 
it  was  further  increased  to  $1,750,000,000,  and  later  to 
$4,250,000,000.  The  issues,  which  stood  at  $817,000,000 
on  July  8,  1914,  were  more  than  doubled  a  year  later, 
standing  at  $1,898,500,000  on  July  15,  1915 ;  by  Febru- 
ary 16,  1916,  they  were  $2,903,000,000.  The  gold 
reserve,  which  in  1914  was  50  per  cent,  of  the  outstand- 
ing issues,  had  fallen  on  the  last  named  date  to  28  per 
cent.  Gold  payments  had  been  suspended  at  the 
beginning  of  the  war,  however,  so  the  note  issues  had 
now  all  the  characteristics  of  inconvertible  paper  money. 

In  the  countries  thus  far  described  the  issues  of  paper 
money  or  of  bank  notes  were  made  in  response  to  de- 

46 


READJUSTMENTS  AT  OUTBREAK  OF  WAR 

mauds  for  additional  media  of  exchange  as  they  arose. 
Germany,  however,  adopted  this  expedient  as  part  of  a 
prearranged  policy  for  financing  the  war.  Immediately 
upon  the  outbreak  of  war  the  Reichsbank  was  relieved 
of  the  necessity  of  redeeming  its  notes  in  gold.  A  cur- 
rency panic  ensued  which  the  Government  endeavored 
to  meet  by  the  issue  of  silver  coins.  As  these  too  began 
to  be  hoarded,  Imperial  Treasury  notes  in  denomination 
of  10  marks  were  issued.  The  most  important  agencies 
which  were  established  for  the  purpose  of  supplying  the 
people  with  the  necessary  currency  were  the  loan  offices 
(Darlchenskassen) .  These  were  empowered  to  make 
loans  on  various  forms  of  collateral  which  were  not 
generally  acceptable  at  banks,  for  which  they  gave  to 
the  borrower  loan-office  notes.  At  first  these  were  issued 
in  denominations  of  five  marks  and  upwards,  but  after 
August  31,  1914,  on  account  of  the  scarcity  of  small 
change,  they  were  put  out  in  denominations  of  one  and 
two  marks.^°  Although  they  were  not  full  legal  tender, 
they  were  receivable  for  all  Imperial  and  State  dues. 
No  gold  reserve  was  held  for  their  redemption,  but  they 
were  based  upon  the  collateral  which  was  pledged  for 
the  loans.  In  addition  to  the  loan  offices,  there  were 
also  municipal  loan  bureaus  which  loaned  to  small 
merchants  and  handworkers  at  rates  somewhat  higher 
than  the  State  institutions;  finally,  there  were  war 
credit  banks  which  made  loans  to  small  tradesmen  on 
stocks  of  goods  or  on  personal  notes  with  two  endorse- 
ments. A  perfect  network  of  credit  institutions  was 
thus  provided  w^hich  made  the  desired  advances  to  all 
who  could  furnish  any  sort  of  security. 

Austria-Hungary  had  much  the  same  experience  as 
the  other  Continental  countries.     Immediately  upon  the 

^^  J.  L.  Laughlin,  Credit  of  the  Nations,  p.  215. 

47 


WAR  COSTS  AND  THEIR  FINANCING 

outbreak  of  war  the  Currency  Act  requiring  metallic 
reserves  and  imposing  a  tax  upon  excess  issues  not  thus 
covered  was  repealed.  There  were  runs  on  the  Imperial 
Bank  and  hoarding  of  gold  which  necessitated  to  a 
certain  extent  the  issue  of  bank  notes.  The  issues  of 
the  Austro-Hungarian  Bank,  however,  were  not  deter- 
mined solely  by  the  needs  of  commerce,  but  were  utilized 
also  to  make  advances  to  the  Government.  The  amount 
of  bank  notes  in  circulation,  which  stood  at  $425,800,000 
on  July  23,  1914,  had  risen  to  $1,028,000,000  by  the  end 
of  December.  Excuses  were  given  for  these  additions 
to  the  circulating  medium  on  the  ground  of  the  increased 
activities  of  the  Government  and  the  need  for  additional 
notes  to  take  the  place  of  the  hoarded  gold.  It  is  evi- 
dent, however,  that  the  increase  in  the  note  issues  was 
vastly  greater  than  could  be  justified  by  either  of  these 
reasons.  In  fact,  this  was  the  beginning  of  a  movement 
of  inflation  in  the  Dual  Monarchy  which  went  on  at 
increasing  speed  throughout  the  whole  course  of  the 
war. 

The  movement  of  foreign  exchange  in  the  first  few 
months  after  the  outbreak  of  war  seemed  to  follow  an 
erratic  course  and  caused  apprehension  in  many  quar- 
ters. Looking  back  upon  the  events  of  that  period,  it 
is  now  possible  to  explain  them.  The  great  creditor 
nations,  England  and  France,  and  to  a  lesser  degree 
Germany,  made  a  determined  effort  to  collect  the  debts 
due  them.  As  these  amounted  to  hundreds  of  millions 
of  dollars,  exchange  rates  on  other  countries  immediately 
went  in  favor  of  those  nations.  Sterling  and  franc 
exchange  in  New  York  rose  to  unprecedented  heights, 
as  the  United  States  was  a  debtor  to  an  enormous 
amount  to  these  countries.     In  consequence  of  the  high 

48 


READJUSTMENTS  AT  OUTBREAK  OF  WAR 

rate  of  exchange,  far  above  the  gold-shipping  point,  a 
heavy  movement  of  gold  set  in  from  the  debtor  to  the 
creditor  nations.  The  net  exports  of  gold  from  the 
United  States  between  August  1  and  December  31,  1914, 
amounted  to  $81,719,000.  This  movement  caused  great 
anxiety  not  only  to  the  countries  which  were  losing  the 
precious  metal,  like  the  United  States,  but  also  to  those 
countries,  like  England,  tlie  rate  of  whose  exchange  was 
so  violently  affected.  So  great  indeed  was  the  anxiety 
felt  in  banking  circles  in  London  that  a  special  commis- 
sion was  dispatched  to  the  United  States  to  inquire  into 
the  desirability  of  measures  to  correct  the  existing 
situation.  The  worry  was  needless,  however,  for  the 
high  rate  of  sterling  exchange  was  only  temporary,  and 
the  movement  of  gold  from  the  Uniti'd  States  to  Ottawa 
on  English  account  was,  and  in  the  nature  of  things 
could  be,  only  temporary.  The  shipment  of  gold  came 
to  an  end  when  the  outstanding  indebtedness  was 
liquidated  or  taken  care  of  in  other  ways.  To  judge 
from  the  prevailing  rates  of  foreign  exchange,  this 
movement  would  seem  to  have  spent  itself  by  the  end 
of  the  year  1914.  By  that  time  the  United  States  and 
other  neutral  countries  had  taken  care  of  their  current 
obligations,  and,  on  the  other  hand,  the  belligerents 
began  to  buy  largely  of  war  materials  and  foodstuffs. 
Sterling  exchange,  which  had  steadily  declined  from  the 
high  point  reached  in  August,  fell  in  January  below  its 
par  of  $4.87. 

Like  any  organism  upon  which  a  serious  wound  is 
inflicted,  the  industrial,  commercial,  and  financial  world 
suffered  a  serious  shock  from  the  outbreak  of  war,  but, 
like  a  living  organism,  it  adjusted  itself  more  or  less 
quickly  and  with  varying  success  to  the  new  conditions. 

49 


WAR  COSTS  AND  THEIR  FINANCING 

Two  periods  of  adjustment  may  fairly  be  distinguished. 
There  was  the  first  short,  quick  spasm  of  recovery  from 
utter  panic  and  dismay.  This  lasted  possibly  a  week, 
during  which  the  first  temporary  relief  measures 
described  above  were  perfected.  Then  followed  a  slower 
process  of  transition  from  a  peace  to  a  war  basis.  The 
period  required  for  this  larger  adjustment  was  natur- 
ally different  in  different  countries.  In  agricultural 
countries  such  as  Russia  or  Austria-Hungary,  which  may 
be  said  to  have  had  one  hand  on  the  plow  and  tlie 
other  on  the  sword,  the  disorganization  attendant  upon 
the  declaration  of  a  state  of  war  was  not  so  serious.  But 
in  a  highly  industrialized  state  like  England,  and  to  a 
lesser  degree  in  Germany,  the  disorganization  was  severe 
and  far-reaching.  France  stood  about  midway  between 
the  two  extremes,  but  to  industrial  disorganization  was 
added  in  her  case  military  invasion  and  the  seizure  of 
some  of  her  most  highly  developed  provinces.  Anotb.er 
factor  which  differentiated  the  warring  countries  was 
the  extent  to  which  the  adult  male  population  was 
mobilized  for  war  and  withdrawn  from  productive 
industry.  Here  again  France  was  the  most  crippled, 
followed  by  Germany  in  the  second  place,  with  England 
last. 

Because  of  these  differences  between  the  various 
belligerents,  it  is  difficult  to  make  any  generalization, 
but  it  is  probably  safe  to  say  that  the  necessary  adjust- 
ments from  peace  to  war  conditions  were  made  within  a 
few  weeks  in  the  countries  primarily  agricultural  and 
in  the  agricultural  sections  of  the  others.  As  their 
crops  had  been  for  the  most  part  harvested,  the  work 
of  the  season  was  over  and  the  calling  of  the  men  to 
the  colors  did  not  immediately  affect  production.  In 
the  industrial  sections,  however,  industry  and  commerce 

50 


READJUSTMENTS  AT  OUTBREAK  OF  WAR 

had  met  with  a  serious  shock.  Although  commerce  was 
greatly  disturbed,  it  was  never  seriously  imperilled,  and 
within  a  month  the  British  Navy  had  practically  swept 
the  seas  of  German  cruisers.  Insurance  rates,  which 
in  the  first  panic  days  had  been  run  up  by  Lloyd's  as 
high  as  80  per  cent,  of  the  value  of  the  hull,  were 
quickly  brought  down  to  normal.  The  importance  of 
shipping  was  realized  as  so  great  by  Great  Britain  that 
the  Government  early  assumed  the  burden  of  granting 
war  insurance  on  British  vessels  and  later  on  their 
cargoes.  On  August  15,  1914,  the  rates  were  fixed  at 
21/2  per  cent,  on  hulls  for  three  months.  A  couple  of 
weeks  later  this  was  reduced  to  two  per  cent.  This 
fact  in  itself  is  eloquent  of  the  increased  safety  of  Allied 
and  neutral  trade  on  the  high  seas. 

There  were  two  obstacles  to  a  complete  and  speedy 
adjustment  of  peace-time  industry  to  war  conditions. 
One  of  these  was  the  very  general  belief  that  the  war 
would  be  over  in  a  comparatively  short  time,  and  that 
therefore  it  would  not  be  necessary  or  desirable  to  make 
radical  changes  in  the  industrial  or  financial  organiza- 
tion. In  all  the  countries  resort  was  had  at  first  to 
bank  advances  and  to  short-term  credit  obligations. 
Germany  was  the  first  to  place  a  long-time  loan,  and  she 
did  not  undertake  this  until  September,  1914.  The  other 
nations  followed  at  intervals  less  or  greater  according 
to  their  financial  strength.  There  was  a  general  unwil- 
lingness to  resort  to  vigorous  and  heavy  taxation,  which 
went  so  far  in  Germany  as  to  lead  the  Chancellor  to 
declare  that  no  taxes  whatever  would  be  levied  for 
carrying  on  the  war.  What  was  the  use,  since  they 
expected  to  collect  indemnities  from  a  conquered  foe? 
Even  in  England,  tlie  single  country  among  the  Euro- 
pean belligerents  to  impose  heavy  taxation  during  the 

51 


WAR  COSTS  AND  THEIR  FINANCING 

war,  it  was  not  introduced  until  November,  1914,  and 
tlit'n  it  fell  far  short  of  the  necessities  of  the  situation. 
Two  factors  contributed  to  this  attitude.  The  first  was 
a  general  belief  that  the  cost  of  the  war  was  so  great 
that  it  could  not  continue  more  than  a  few  months ;  the 
whole  finances  of  the  Governments  would  break  down 
under  the  strain  if  in  the  meantime  a  military  decision 
did  not  end  it."  Second,  there  seems  to  have  been  a 
general  belief  that  a  military  decision  would  be  attained 
within  a  comparatively  few  months,  for  it  did  not  seem 
possible  that  the  Central  Powers  could  withstand  the 
combination  of  nations  which  was  weekly  securing  new 
adherents. 

The  other  factor  militating  against  a  reorganization  of 
industry  so  as  to  make  it  serve  the  single  purpose  of 
winning  the  war  was  the  general  insistence  that  there 
should  be  no  interference  with  normal  business.  This 
belief  found  expression  in  the  slogan  "  business  as 
usual."  Although  it  was  founded  upon  a  thoroughly 
fallacious  economic  analysis  as  to  the  nature  of  produc- 
tion and  consumption,  it  nevertheless  exercised  a  potent 
influence  in  the  early  months  and  even  years  of  the 
war.  Not  until  shortened  rations,  lessened  man  power, 
higher  prices,  and  grim  necessity  had  forced  the  lesson 
home  to  the  people  did  they  begin  to  understand  that 
war,  especially  on  the  scale  of  the  "World  "War,  could  not 
be  taken  on  as  an  "  extra  "  in  addition  to  carrying  on 
business  as  usual.  "When  that  time  arrived,  the  entire 
productive  energies  of  the  people  were  directed  to  the 

"  Thus  Edgar  Crammond  thought  "  economic  exhaustion  and 
the  exhaustion  of  men  and  war  materials  will  render  it  impossible 
for  some  of  the  principal  belligerents  to  continue  the  conflict 
after  July  next."  ("Cost  of  the  War,"  Journal  of  the  Royal 
Statistical  Society.  May,  1915,  p.  .364).  See  also  L'Economiste 
fravrais.  January  30,  1015.  p.  132.  for  a  statement  that  the  war 
would  not  last  longer  than  seven  months. 

52 


READJUSTMENTS  AT  OUTBREAK  OF  WAR 

task  of  winning  the  war,  and  non-essential  industries 
were  subordinated  to  this  purpose.  The  length  of  time 
required  to  achieve  such  a  unity  of  purpose  and  action 
differed,  of  course,  in  the  different  countries.  Germany, 
it  may  be  said,  was  thus  organized  from  the  beginning. 
England  required  probably  the  longest  time  to  make 
her  adjustment  complete  and  thoroughgoing,  and  the 
other  nations  took  varying  rank  between  these  two. 


CHAPTER  III 

THE  UNITED  STATES   AS  A  NEUTRAL 

Situation  in  the  United  States  at  the  outbreak  of  the  war  in 
Europe  —  The  expansion  of  foreign  trade  —  How  Europe  paid 
its  bills  —  The  shipment  of  gold  —  Foreign  loans  placed  in 
the  United  States  —  Purchase  of  American  securities  held 
abroad  —  Is  New  York  to  be  the  financial  center  of  the 
world? 

The  disorganization  in  ihe  European  security  market 
which  followed  the  ultimatum  of  Austria-Hungary  to 
Serbia  was  not  without  its  effect  on  the  United  States. 
During  the  week  preceding  Friday,  July  31,  in  spite 
of  a  deluge  of  selling  orders  from  Europe,  where  condi- 
tions bordering  on  panic  prevailed,  the  New  York 
market  stood  its  ground  wonderfully.  There  was,  how- 
ever, a  steady  decline  in  prices,  which  became  more  vio- 
lent on  July  30.  The  evidences  of  an  approaching  panic 
began  to  show  themselves,  and  to  avoid  serious  trouble 
the  New  York  Stock  Exchange  was  closed  on  July  31,^ 
for  the  second  time  in  its  history,  the  first  having  been 
for  ten  days  in  1873.  Fortunately,  speculation  on  the 
New  York  market  had  been  for  several  years  at  low  ebb, 
so  that  values  were  not  inflated  or  long  accounts  stand- 
ing. Industry,  too,  w^as  on  a  firm  basis,  for  the  depres- 
sion of  the  previous  year  had  necessitated  economy  and 
brought  business  down  to  bedrock.     The  financial  and 

*  The  Exchange  remained  closed  until  November  28,  1914,  when 
it  was  opened  for  dealings  in  a  restricted  list  of  bonds.  This 
proved  very  successful,  and  on  December  11  a  further  step  was 
taken.  Permission  was  given  to  trade  in  a  list  of  stocks  which 
were  not  international  in  character  at  or  above  prescribed  mini- 
mum prices.  Four  days  later  the  Exchange  opened  entirely  under 
a  free  market. 

54 


THE  UNITED  STATES  AS  A  NEUTRAL 

business  world,  therefore,  was  in  a  good  position  to 
withstand  the  sliock  to  credit  which  followed  the  out- 
break of  the  war  in  Europe. 

The  credit  situation,  however,  did  not  pertain  to  New 
York  alone,  but  was  international  in  character.  The 
most  serious  condition  which  developed  was  the  break- 
down in  the  international  credit  mechanism.  London 
was  the  financial  center  of  the  world,  and  there  focused 
a  great  mass  of  debits  and  credits.  The  floating 
indebtedness  of  the  United  States  to  London,  which 
was  ascertained  by  special  inquiries,  amounted  to 
$580,000,000,  and  the  debts  of  the  rest  of  the  world 
brought  the  total  up  to  a  much  larger  figure.  In  the 
first  excitement  and  uncertainty  of  the  crisis  London 
demanded  immediate  payment  of  these  obligations  by 
its  debtors.  On  the  other  hand,  the  London  banks 
almost  ceased  the  acceptance  of  further  bills  of 
exchange ;  indeed,  with  the  complete  disruption  of 
foreign  trade  the  supply  of  these  bills  fell  off  rapidly. 
The  result  was  a  veritable  impasse. 

The  debts  owed  to  England,  France,  Germany,  and 
the  other  nations  of  Europe  by  the  United  States  matur- 
ing between  August  1,  1914,  and  January  1,  1915, 
amounted  to  considerably  over  a  half-billion  dollars, 
of  which  $200,000,000  was  immediately  due.  The  most 
important  single  item  was  a  debt  of  $80,000,000  owing 
by  the  City  of  New  York  to  London  and  Paris  and  due 
between  September  1  and  January  1.  New  York  City 
with  its  enormous  budget  has  always  been  a  large  bor- 
rower and  she  had  been  in  the  habit  of  borrowing  on 
her  tax  warrants  in  the  cheapest  market,  which  hap- 
pened the  previous  year  to  have  been  in  France  and 
England  rather  than  at  home.  To  meet  this  debt  a 
syndicate  was  formed  of  New  York  bankers  to  which 

55 


WAR  COSTS  AND  THEIR  FINANCING 

New  York  City  sold  $100,000,000  of  her  six  per  cent, 
notes,  receiving  therefor  $80,000,000  in  gokl  or  adequate 
exchange.  These  and  other  debts  owing  to  London  were 
liquidated  within  three  months  by  the  transfer  of  gold 
or  credits.  To  meet  this  indebtedness  large  shipments 
of  gold  were  necessary,  as  the  paralysis  of  foreign  trade, 
due  to  activities  of  German  cruisers,  prevented  the 
export  of  commodities  with  which  normally  our  foreign 
balances  would  have  been  met.  Cotton,  grain,  and 
manufactured  goods  of  various  kinds  piled  up  on  the 
docks  and  congested  the  railways  leading  to  the 
seaboard. 

Since  the  export  of  commodities  was  prevented 
and  the  stock  exchanges  were  closed,  there  was 
practically  only  one  method  by  which  the  balance 
of  international  indebtedness  could  be  met,  and 
that  was  by  the  shipment  of  gold.  On  July  28 
some  $10,700,000  went  out  on  the  Kronprinzessin- 
Cecilie,  but  the  ship  was  intercepted  by  wireless  and 
returned  to  the  nearest  American  port.  Congress  appro- 
priated funds  to  be  sent  abroad  on  the  cruiser 
Tennessee  for  the  relief  of  American  tourists  overtaken 
in  almost  every  European  port  and  unable  to  secure 
cash  by  reason  of  the  foreign  moratoria.  For  this  pur- 
pose $35,000,000  in  gold  was  shipped  from  New  York 
in  early  August  and  its  safe  passage  guaranteed  to  the 
United  States  Government  by  the  warring  powers. 
Sterling  exchange,  the  normal  rate  for  which  is  $4,866, 
soared  to  the  high  point  of  $5.50  by  the  end  of  July,  and 
it  was  reported  by  the  Commercial  and  Financial 
Chronicle  to  have  climbed  to  the  unprecedented  price 
of  $7  on  August  1. 

The  situation  became  chaotic  and  so  fraught  with 
danger  in  view  of  the  large  transfers  that  had  to  be 

56 


\ 


THE  UNITED  STATES  AS  A  NEUTRAL 

made  that  tlie  leading  banks  in  New  York  agreed  to  fix 
an  arbitrary  rate  of  $5  for  sterling  exchange.  This, 
of  course,  was  only  a  temporary  arrangement.  A  more 
effective  method  of  dealing  with  the  situation  was  the 
creation  of  a  ''  gold  pool,"  as  it  was  called;  a  fund  of 
$100,000,000  in  gold  was  subscribed  by  a  number  of 
national  and  state  banks  and  trust  companies  in  the 
reserve  cities  to  guarantee  the  payment  of  American 
debts  in  London.  Ten  per  cent,  of  the  sum  was  collected 
and  sent  to  the  New  York  Clearing  House,  and  part  of 
this  was  deposited  by  the  Clearing  House  at  Ottawa  to 
the  credit  of  the  Bank  of  England.  Arrangements  were 
made  by  which  this  gold  fund  was  to  be  considered  part 
of  the  Bank  of  England's  gold  reserve,  so  that  the 
danger  of  shipping  gold  abroad  would  be  eliminated. 
Deposits  in  the  Bank  of  Ottawa  were  credited  to  the 
depositors'  London  account  at  the  fixed  price  of  $4.90. 
These  measures  relieved  the  tension  in  a  marked  degree, 
and  the  end  of  1914  saw  exchange  on  London  and  Paris 
practically  back  to  normal,  the  sterling  maximum  for 
December  being  $4.89. 

The  next  difficulty  that  presented  itself  was  the  dis- 
posal of  an  unprecedented  cotton  crop  amounting  to 
fifteen  million  bales  and  worth  some  $700,000,000.  The 
exports  declined  sharply,  owing  chiefly  to  the  cutting 
off  of  the  German  demand.  This  placed  the  cotton 
growers  and  traders  in  a  peculiarly  difficult  position,  as 
the  growing  and  marketing  of  the  cotton  crop  is  financed 
largely  by  means  of  credit.  The  South  was  on  the  verge 
of  a  financial  breakdown  because  of  the  paralysis  of  the 
movement  of  cotton.  Accordingly  another  pool  was 
formed  to  lend  up  to  $150,000,000  on  cotton.  Another 
movement,  more  or  less  sentimental  in  its  inception  but 
ultimately  profitable   to   the   participants  therein,   was 

57 


WAR  COSTS  AND  THEIR  FINANCING 

the  ''  buy-a-bale  "  campaign,  which  resulted  in  the  pur- 
chase of  thousands  of  bales  of  cotton  by  purchasers  in 
this  country  who  stored  them  until  prices  reached  nor- 
mal again.  Relief  to  the  general  situation  was  also 
brought  by  the  organization  of  a  Bureau  of  War  Risk 
Insurance  by  the  Treasury  Department,  which  facili 
tated  the  movement  of  our  exports.  The  speedy  asser- 
tion by  Great  Britain  of  her  mastery  of  the  seas  soon 
permitted  the  resumption  of  ocean  transportation  and 
the  export  of  commodities  from  the  United  States. 

By  these  various  measures  the  country  was  able  to 
meet  successfully  the  difficult  and  complicated  interna- 
tional financial  problem.  But  the  United  States  had 
its  own  troubles  which  it  was  forced  to  solve  at  home. 
The  money  markets  and  banks  found  themselves  em- 
barrassed at  the  outbreak  of  the  war,  as  always  occurs 
in  any  panic,  by  a  shortage  of  currency.  This  was  met 
by  the  distribution  through  the  Treasury  of  $141,228,000 
in  emergency  currency.  Provision  had  originally  been 
made  for  such  an  emergency  issue  in  the  Aldrich-Vree- 
land  Act  of  1908,  and  when  the  Federal  Reserve  Act 
was  passed  in  1913  the  provision  covering  an  emergency 
circulation,  which  would  have  expired  on  June  30,  1913, 
was  extended  one  year.  This  currency  had  never  been 
used,  and  was  intended,  as  its  name  implies,  simply  for 
use  in  an  emergency.  The  emergency  occurred  when 
the  war  broke  out  in  Europe,  and  the  Treasury  promptly 
took  advantage  of  the  provisions  of  the  Act.  By 
October  the  total  issues  of  emergency  notes  amounted  to 
$369,000,000.  With  the  opening  of  the  Federal  reserve 
banks  for  business  in  the  following  month  these  emer- 
gency notes  were  speedily  retired.  They  had  been  of 
great  service  in  the  crisis  which  occurred  before  the 
Federal  reserve  system  was  put  in  operation,  but  after 

58 


THE  UNITED  STATES  AS  A  NEUTRAL 

November  the  power  to  issue  Federal  reserve  notes  ren- 
dered this  emergency  currency  of  no  further  importance. 

One  of  the  most  important  and  far-reaching  effects 
of  the  war  was  the  enormous  expansion  of  the  foreign 
trade  of  the  United  States.  After  the  first  panic  and  dis- 
organization of  our  foreign  commerce,  orders  began  to 
pour  in  from  Europe  for  foodstuffs,  for  raw  material 
of  all  kinds,  and  finally  for  actual  munitions  of  war. 
This  increased  demand  was  not  due  to  the  superior 
excellence  or  cheapness  of  our  goods.  It  was  caused 
rather  by  the  necessities  of  the  allied  belligerents  in 
Europe,  who  in  the  urgency  of  immediate  action  against 
a  shrewd  and  well  prepared  foe  turned  to  us  for 
material  assistance.  The  excess  of  our  exports  over 
our  imports  jumped  from  $470,653,000  in  the  year 
ending  June  30,  1914,  to  $1,094,419,000  for  the  next 
12-month  period.  The  following  year  saw  this  figure 
doubled,  the  favorable  balance  of  trade  for  the  fiscal 
year  1916  amounting  to  $2,135,600,000.  Not  only  was 
the  volume  greatly  expanded,  but  the  character  of  our 
trade  also  underwent  a  remarkable  change.  The  expan- 
sion took  place,  as  might  be  expected,  primarily  in  the 
group  of  commodities  which  ministered  directly  to  war 
needs.  A  tabulation  issued  in  August,  1915,  selected 
the  14  most  important  groups  of  commodities  of  this 
nature  and  compared  the  exports  for  the  preceding  10 
months  with  those  of  the  corresponding  10  months  before 
the  war.-  The  four-fold  increase  shown  in  this  table 
gives  clear  evidence  of  the  relation  between  war  orders 
and  the  expansion  of  our  foreign  trade,  and  proves  how 
greatly  our  favorable  balance  was  due  to  the  sale  of  sup- 
plies to  the  belligerents. 

'Babson's  Report  of  August  29,  1915. 

59 


WAR  COSTS  AND  THEIR  FINANCING 


United  States  Foreign  Trade,  War  and  Prb-War 


Commodities 

10  months 
to  June,  1915 

10  pre-war 
montlis 

Mules  and  horses 

$73,000,000 
155,000,000 
116,000,000 

21,000,000 
6,300,000 

93,000,000 
2,700,000 

88,000,000 
472,000,000 
120,000,000 

231,000,000 
47,500,000 
36,800,000 

366,000,000 

$3,500,000 

Brass,  bronze,  etc    

6,000,000 

Automobile  parts 

20,000,000 

Railway  cars        

10,000,000 

Airplanes 

195,000 

Chemicals 

22,000,000 

Motorcycles 

900,000 

Cotton  goods 

43,000,000 

Iron  and  steel 

212,000,000 

Shoes  and  leather 

47,000,000 

Canned     goods,     meat,     and 
dairy  products 

124,000,000 

Wool  and  woolen  goods 

Zinc,  etc 

3,900,000 
328 , 000 

Explosives 

5,000,000 

Total 

$1,798,300,000 

$497,823,000 

The  meaning  of  this  growth  in  our  foreign  trade 
becomes  more  apparent  with  further  analysis.  The  most 
striking  feature  was  the  enormous  increase  in  exports  to 
the  five  leading  nations  of  the  Entente  Allies.  Prom 
$927,000,000  in  the  fiscal  year  1914,  exports  to  these 
countries  grew  to  $2,432,000,000  in  1915,  and  to 
$3,012,000,000  in  1916.  On  the  other  hand,  the  exports 
to  the  Central  Powers,  which  in  1914  had  been 
$370,000,000,  declined  in  1915  to  $30,600,000,  and  in 
1916  almost  disappeared,  amounting  then  to  only  half 
a  million.  Part  of  this  loss  to  the  Central  Powers  was 
made  up  by  indirect  trade  through  the  medium  of  the 
northern  European  neutrals,  the  exports  to  which  more 
than  doubled  between  1914  and  1916,  increasing  from 
$150,000,000  to  $328,000,000.  Although  the  following 
year  saw  a  decline  in  this  trade  to  $245,000,000,  it  was 
still  far  in  excess  of  the  normal  pre-war  trade. 

60 


THE  UNITED  STATES  AS  A  NEUTRAL 

Tlie  imports  from  tlie  Entente  Allies  not  only  did  not 
increase  with  their  enlarged  purchases,  but  even  fell  off 
in  the  two  years  following  the  outbreak  of  the  war. 
Those  from  the  northern  European  neutrals  remained 
fairly  steady.  The  belligerent  countries  were  in  no  con- 
dition to  pay  for  the  commodities  which  they  were 
taking  from  the  United  States  by  a  return  of  their  own 
raw  materials  or  manufactures.  All  the  energies  of  these 
belligerents  were  being  directed  into  war  activities,  and 
normal  trade  was  left  to  take  care  of  itself  as  best  it 
could.  The  result  was  that  these  purchases  had  to  be 
paid  for  by  other  means  than  exchange  of  commodities. 
There  were  only  three  other  ways  by  which  such  trade 
could  be  financed,  namely,  the  shipment  of  gold,  the 
sale  of  securities,  and  the  establishment  of  credits.  As 
will  be  seen,  each  of  these  methods  was  used  in  turn. 

The  enormous  trade  balance  piled  up  in  favor  of  the 
United  States  was  hailed  with  joy  in  this  country  as 
an  index  of  our  prosperity,  but  in  some  respects  the 
trade  developed  as  a  result  of  war  orders  exerted  an 
unfortunate  influence  upon  our  economic  life.  Manu- 
facturing industries  were  almost  revolutionized.  Those 
which  could  contribute  to  turning  out  munitions  or  war 
supplies  expanded  'under  the  beneficent  influence  of 
orders  which  were  placed  almost  regardless  of  price. 
With  the  diversion  of  labor  and  capital  into  war  indus- 
tries, however,  other  enterprises  suffered  correspond- 
ingly. Building  operations  were  almost  at  a  standstill, 
and  in  spite  of  the  rush  of  war  orders,  unemployment 
in  many  cities  and  industries  was  a  serious  problem. 
The  favorable  balance  of  trade  had,  indeed,  one  good 
aspect,  for  it  indicated  that  the  United  States,  so  long 
a  debtor  nation,  was  now  paying  off  its  debts.  But  the 
stimulation  of  American  business  involved  in  these  war 

61 


WAR  COSTS  AND  THEIR  FINANCING 

orders  was  not  witlioiit  danger.  The  development  was 
a  very  uneven  one,  resulting  in  a  relative  depression 
of  some  industries  and  an  over-development  of  others. 
The  resulting  trade  expansion  was  clearly  abnormal, 
based,  as  it  was,  not  upon  the  exchange  of  commodities, 
but  upon  the  borrowing  capacity  of  our  customers. 
Moreover,  while  the  war  orders  were  bringing  a  flood 
of  gold  and  surface  prosperity  to  the  people  of  the 
United  States,  prices  and  wages,  especially  in  the  indus- 
tries affected,  were  being  driven  up  to  record  heights. 
The  prosperity  was  certainly  being  very  unevenly 
distributed. 

There  was  another  aspeci:  of  our  foreign-trade  expan- 
sion which  has  called  forth  endless  comment.  This  was 
the  opportunity  opened  to  the  United  States  to  capture 
the  foreign  markets  in  South  America  and  the  East. 
The  stoppage  of  German  trade  with  those  countries  as 
the  result  of  the  driving  from  the  seas  of  practically  all 
German  vessels  and  the  reduction  of  British  trade  as 
the  result  of  the  absorption  of  Great  Britain  in  war 
activities  gave  an  unrivalled  opportunity  to  the  United 
States,  but  the  people  of  this  country  were  too  occupied 
with  the  immediate  profits  to  be  made  in  filling  war 
orders  to  endeavor  to  build  up  a  new  trade  in  foreign 
markets.  Exports  to  South  America,  in  fact,  showed 
a  decline  from  $122,000,000  in  1914  to  $97,000,000  in 
1915.  The  following  year,  however,  witnessed  a  signifi- 
cant increase  to  $176,000,000.  Imports  from  South 
American  countries,  on  the  other  hand,  showed  a  rapid 
growth.  From  $221,000,000  in  1914,  they  increased  to 
$259,000,000  in  1915,  and  to  $390,000,000  in  1916. 
Much  of  this  increase  was  in  foodstuffs  and  raw 
materials  which  found  their  way  ultimately  to  Europe, 
although  some  of  them  were  consumed  in  this  country. 

62 


THE  UNITED  STATES  AS  A  NEUTRAL 

In  other  words,  the  expansion  of  our  trade  with  South 
America,  so  far  as  it  showed  a  growth,  resulted  from 
our  acting  as  agent  for  European  belligerents  or 
because  we  were  taking  our  pay  from  England  and  her 
allies  in  orders  on  South  American  countries  for  their 
goods.  Great  as  was  the  expansion  of  our  foreign  trade 
during  the  first  two  years  of  the  war,  there  was  nothing 
in  it  to  make  us  boastful  of  our  achievements.  Our 
sales  to  the  belligerents  and  our  capture  of  neutral 
markets  came  to  us  as  one  of  the  incidents  of  the  war, 
and  not  because  we  had  surpassed  our  industrial  com- 
petitors in  open  market. 

While  the  people  of  the  United.  States  were  enjoying 
extraordinary  prosperity  from  the  flood  of  war  orders 
which  poured  in  upon  them,  the  Governments  of  Europe 
were  devising  ways  and  means  of  meeting  these  expendi- 
tures. As  already  indicated,  there  were  three  ways  in 
which  the  European  nations  might  pay  for  their  enor- 
mous purchases:  (1)  by  shipments  of  gold  to  cover  the 
adverse  balances  of  trade  against  them;  (2)  by  return- 
ing American  securities  held  by  them  and  disposing  of 
others  in  the  United  States  market;  and  (3)  by  estab- 
lishing credits  in  this  country.  It  is  a  matter  of  record 
that  all  three  methods  were  used.  The  adoption  of  one 
did  not  preclude  resort  to  the  others;  in  fact,  all  three 
were  sometimes  used  at  the  same  time ;  but  in  the  main, 
emphasis  was  placed  on  each  one  in  turn. 

As  has  been  seen,  the  movement  of  gold  was  strongly 
from  the  United  States  to  Europe  in  the  first  troubled 
and  uncertain  months  after  the  declaration  of  war.  The 
net  loss  to  this  country  between  August  1  and  December 
31,  1914,  was  $81,720,000.  By  that  time,  and  indeed 
before,  the  necessary  commercial  and  financial  adjust - 

63 


WAR  COSTS  AND  THEIR  FINANCING 

ments  from  a  peace  to  a  war  basis  had  taken  place,  and 
England  and  her  allies  had  turned  to  the  United  States 
to  supply  them  with  food,  munitions,  and  other 
materials.  The  enormous  exportations  caused  sterling 
exchange  to  fall  lower  and  lower,  until  this  tinally 
reached  the  level  of  $4.49  on  September  4,  1915.  At 
these  declining  rates  gold  began  to  flow  into  this  coun- 
try in  ever  increasing  quantities,  the  net  imports  for 
the  first  six  months  of  1915  amounting  to  $140,694,000, 
and  those  for  the  next  six  months  to  $280,268,000. 

It  is  evident  that  there  was  a  limit  to  the  extent  to 
which  gold  could  be  used  to  pay  European  debts.  The 
outflow  from  England  threatened  to  reduce  the  gold 
reserve  of  the  Bank  of  England  to  an  uncomfortably 
low  point,  and  the  Bank  of  France,  from  which  some 
of  the  gold  was  drawn,  was  unwilling  to  see  its  stock 
further  reduced.  Indeed,  beyond  a  certain  point  Europe 
could  not  spare  the  gold,  and  to  demand  it  of  her  would 
cripple  her  banking  and  financial  institutions.  Nor,  on 
the  other  hand,  did  the  United  States  wish  to  be  paid 
exclusively  in  gold ;  its  accumulation  would  simply  mean 
the  heaping  up  of  idle  reserves  and  the  raising  of  prices. 
Large  as  were  the  importations  of  gold,  they  were  after 
all  only  a  drop  in  the  bucket  when  compared  with  the 
excess  of  exports  over  imports.  In  1915  the  favorable 
balance  of  trade  to  the  credit  of  the  United  States 
amounted  to  $1,094,420,000  and  in  1916  it  rose  to  the 
still  more  staggering  total  of  $2,135,600,000.  It  is 
evident  that  the  $420,000,000  in  gold  imported  would 
not  go  far  toward  liquidating  such  a  balance  as  that  of 
even  the  earlier  year.  In  normal  times  the  charges  to 
be  met  for  foreign  travel,  interest  on  American  securities 
held  abroad,  payments  for  freight,  insurance,  etc.,  would 
have  amounted  to  some  $500,000,000   or  $600,000,000 

64 


THE  UNITED  STATES  AS  A  NEUTRAL 

annually.  Fully  half  of  these  payments  were  no  longer 
being  made,  but  even  assuming  no  diminution  in  these 
items,  they  together  with  the  imports  of  gold  would 
have  paid  for  only  something  over  half  of  the  net  mer- 
chandise exports  from  the  United  States.  It  was  still 
necessary  for  Europe  to  make  payment  for  the  excess 
of  some  $700,000,000  which  she  received  during  the 
fiscal  year  1915.  It  w^as  evident  that  other  means  than 
shipment  of  gold  would  have  to  be  devised  to  meet  these 
debts. 

The  purchase  of  short-term  obligations  of  foreign 
Governments  was  practically  unknown  to  the  people  of 
the  United  States  before  the  Great  War.  A  few  loans 
had  been  made  to  Canada,  to  China,  and  to  some  of  the 
Latin-American  countries,  but  they  had  been  of  a 
temporary  character,  and  the  securities  had  been  easily 
parted  with.  The  opportunities  for  investment  had 
always  been  so  profitable  in  the  United  States,  and  the 
need  for  capital  so  great,  that  there  w^as  very  little 
inducement  for  an  American  investor  to  seek  foreign 
enterprises.  The  West  has  been  to  the  American  capi- 
talist what  the  colonies  have  been  to  the  British  —  the 
undeveloped  region  w'hicli  offered  returns  larger  than 
he  could  secure  from  his  immediate  neighborhood. 
There  was,  therefore,  no  necessity  for  American  investors 
to  look  abroad  for  opportunities  to  place  their  capital, 
and  there  had  consequently  grown  up  in  this  country 
a  prejudice  against  foreign  investment  which  had  to 
be  overcome. 

At  this  time,  however,  the  United  States  was  called 
upon  to  finance  foreign  Governments.  Canada  and 
Argentina,  which  had  previously  secured  the  capital 
they  needed  in  Great  Britain,  now  turned  for  assistance 
to  this  country.     Not  only  these   and  other  countries 

65 


WAR  COSTS  AND  THEIR  FINANCING 

which  had  previously  been  in  the  habit  of  borrowing 
from  Great  Britain  or  France,  but  these  two  financial 
giants  themselves  were  compelled  to  turn  to  the  United 
States  for  loans.  The  foreign  loans  which  were  now 
placed  in  the  United  States,  however,  were  not  the 
ordinary  offerings  of  foreign  securities  for  investment. 
They  were  rather  credits  established  to  pay  for  com- 
modities purchased  in  the  United  Statss.  It  was  neces- 
sary to  make  these  loans  or  to  see  the  war  orders  greatly 
curtailed.  Goods  were  sold  to  the  belligerent  nations 
of  Europe,  and  the  United  States  then  took  its  pay 
in  the  form  in  which  it  tould  be  offered.  An  illustration 
of  this  may  be  found  in  the  flotation  of  the  famous 
Anglo-French  Loan  of  $500,000,000  which  was  negoti- 
ated on  September  28,  1915.  A  special  clause  in  the 
loan  agreement  stipulated  that  the  proceds  were  to  be 
used  exclusively  for  purchases  in  the  United  States,  A 
large  part  of  the  loan  was  simply  allotted  to  various 
munitions  manufacturers  in  part  payment  for  their 
sales  to  England  and  France,  and  in  some  cases  at  least 
these  shares  were  later  distributed  by  these  companies 
as  dividends  among  their  stockholders.  The  loan  con- 
sisted of  five  per  cent,  five-year  bonds  which  were  a 
direct  obligation  of  the  British  and  French  Govern- 
ments. It  was  underwritten  at  96  and  sold  to  the 
public  at  98. 

Although  this  was  the  largest  of  the  foreign  loans 
placed  in  this  country  during  the  first  two  years  of  the 
war,  there  were  many  other  loans  placed  here  by  other 
Governments,  as  well  as  further  loans  by  the  British 
and  French  Governments.  The  following  table  shows 
the  extent  to  which  American  capital  was  being  drawn 
upon  by  investment  in  foreign  short-term  obligations 
down  to  the  time  of  our  own  entrance  into  the  war : 

66 


THE  UNITED  STATES  AS  A  NEUTRAL 


Foreign  Loans  Floated  in  the  United  States,  1915-1917 
Great  Britain: 

Anglo-French     Loan     of     October, 

1915 $250,000,000 

Collateral   loan   of   August.    lOlC.  25().t)()0.000 

Collateral  loan   of  October,    1916.  .  ;50().()()0.()00 

Collateral  loan  of  February,   1917.  250.000.000 

Bank  credit,   renewed    , .  . .' 50.000.000 

Treasury  bills   sold    150.000.000 


Canada : 

August,    1915   $45,000,000 

March,   1916   75.000.000 

July,    1917    100.000.000 


$1,250,000,000 


220,O0T),000 


686.000,000 


France : 

Anglo-French  loan  of  October,  1915  .$250,000,000 

American    Foreign   Securities    loan 

of  July,  1916   100.000.000 

Collateral  loan  of  April   1,   1917..  100,000.000 

City  of  Paris,  October,  1916 50,000,000 

City  of  Bordeaux  1    -vt  —  i, 

•^         J  INovember, 

Mireillesj        1916 36,000,000 

Industrial  credit  through  Bon- 
bright  &  Company   50.000.000 

Treasury  bills   sold    40.000.000 

Collateral  loan  through  Roths- 
child   on    railroad   bonds .30.000.000 

Acceptance  credits  through  banks.  30,000.000 

Russia: 

December.  1916.  Dollar  Loan $50,000,000 

June,  1916,  through  bank  syndicate       20.000,000 

Treasury  notes  sold   ." 25,000.000 

Banking   credits,   private   7.000.000 

107.000.000 

Italy,  1916   25,000.000 

Germany 10.000.000 

Newfoundland 5.000.000 

Mexico 500  000 

Cuba 10.000  OOO 

Panama 2.911.000 

Santo  Domingo  .  • 12,868.350 

Argentina 32.720  000 

Bolivia 4,526,000 

Peru 1.000  000 

ISTorwav 5.000  000 

Switzerland 5,000.000 

67 


WAR  COSTS  AND  THEIR  FINANCING 

China 12,500,000 

Japan 102,552,000 

Municipal  and  state  loans  to  foreign  countries. . . .  213,381,262 
Corporation,    railroad,    public-utility,    and    indus- 
trial foreign  loans   206.436,675 

$2,912,395,287 

The  placing  of  these  large  credits  in  the  United  States 
rendered  less  necessary  the  shipment  of  gold  to  this 
country  hy  European  belligerents.  The  direct  influence 
of  the  Anglo-French  Loan  may  be  seen  in  the  imports 
of  gold  into  the  United  States  during  the  first  half  of 
1916,  This  loan  was  paid  in  instalments  as  needed; 
by  January  3,  1916,  some  three-quarters  of  the  entire 
amount  had  been  paid  in.  While  these  funds  were  still 
available,  the  gold  imports  fell  off  almost  completely. 
This  is  clearly  shown  in  the  following  table: 

Gold  Imports  Into  the  United  States,  1916 

January,  1916   $15,100,000 

Februai-y,    1916   6,000,000 

March,   1916 9,800,000 

April,    1916    6,100.000 

May,  1916 17,300.000 

June,    1916  122,700,000 

As  long  as  the  credits  under  the  loan  were  available, 
importation  of  gold  was  unnecessary,  but  when  they 
were  exhausted,  gold  imports  were  resumed.  Although 
the  inflow  of  gold  steadied  the  rates  of  foreign  exchange, 
this  method  could  not  be  continued  for  any  great  length 
of  time,  and  accordingly  further  large  British  and 
French  loans  were  brought  out  in  July,  August,  and 
October,  1916,  aggregating  $1,000,000,000.  As  these 
loans  contained  some  novel  features,  they  are  worth 
recording.  The  French  loan  in  July  was  obtained 
through  an  organization  specially  created  for  this  pur- 
pose, namely,  the  American  Foreign   Securities  Com- 

68 


THE  UNITED  STATES  AS  A  NEUTRAL 

pany,  with  a  capital  of  $100,000,000.  This  corporation 
obtained  from  the  French  Government  its  obligation 
to  repay  the  principal  in  three  years,  together  with 
collateral  amounting  to  $120,000,000  made  up  of  Gov- 
ernment securities  of  Argentina,  Egypt,  Spain,  Switzer- 
land, Sweden,  Denmark,  and  other  Governments,  some 
foreign  industrial  shares,  and  about  $4,000,000  in 
American  securities.  The  loan,  in  the  form  of  three- 
year  five  per  cent,  gold  notes,  was  taken  over  by  the 
Securities  Company  at  94.5  and  sold  to  the  public  at  98. 
This  transaction  was  interesting  as  the  first  case  in 
which  a  foreign  Government  placed  collateral  in  order 
to  attract  American  investors. 

This  was  quickly  followed  by  the  flotation  of  a 
$250,000,000  British  loan  in  August  on  much  the  same 
terms.  A  syndicate  headed  by  J.  P.  Morgan  &  Com- 
pany took  over  two-year  five  per  cent,  collateral  gold 
notes  of  the  British  Government  secured  by  collateral 
aggregating  in  value  $300,000,000.  It  was  underwritten 
by  the  syndicate  at  98  and  offered  to  the  public  at  99, 
at  which  price  it  was  quickly  taken  up.  The  securities 
which  were  deposited  as  collateral  by  the  British  Gov- 
ernment were  divided  into  three  classes,  each  aggre- 
gating $100,000,000 :  the  first  consisted  of  stocks,  bonds, 
and  other  securities  of  American  corporations;  the 
second,  of  bonds  of  the  Dominion  of  Canada  and  the 
Canadian  Pacific  Railway  Company;  and  the  third,  of 
Government  bonds  of  certain  neutral  countries,  namely, 
Argentina,  Chile,  Norway,  Sweden,  Switzerland,  Den- 
mark and  Holland.  So  successful  were  these  collateral 
loans  that  in  October  another  British  loan  of  the  same 
general  character  for  $300,000,000  was  offered.  This  con- 
sisted half  of  three-year  five  per  cent,  gold  notes  and 
half  of  five-year  five  per  cent,  gold  notes,  secured  by 

69 


WAR  COSTS  AND  THEIR  FINANCING 

direct  obligation  oi'  tlie  British  Government  and  col- 
lateral to  the  amount  of  ^300,000,000.  The  loan  was 
managed  by  a  syndicate  headed  by  J.  P.  Morgan  & 
Company,  which  offered  the  three-year  notes  at  99.25 
and  the  five-year  notes  at  98.5. 

French  municipal  bonds  of  Paris,  Bordeaux,  Lyons, 
and  Marseilles  were  sold  in  Octo])er  and  November.  The 
first  of  these  issues  was  very  successful,  being  three 
times  oversubscribed  during  the  first  day.  But  the  sales 
of  the  sul)sequent  issues  were  adversely  affected  by  a 
warning  of  the  Federal  Reserve  Board  to  banks  against 
tying  up  funds  in  foreign  treasury  bills,  which  might 
not  be  readily  marketable.  This  was  such  an  unusual 
and  important  official  utterance  that  two  or  three  sig- 
nificant sentences  dt?serve  to  be  quoted.^  After  com- 
menting on  press  reports  as  to  its  attitude  towards  the 
purchase  by  banks  in  this  country  of  Treasury  bills  of 
foreign  Governments, 

the  Board  deems  it  a  duty  to  define  its  position  clearly.  .  .  , 
It  would,  therefore,  seem,  as  a  consequence,  that  liquid  funds 
of  our  banks,  which  should  be  available  for  short  credit  facih- 
ties  to  our  merchants,  manufacturers  and  farmers,  would  be 
exposed  to  the  danger  of  being  absorbed  for  other  purposes 
to  a  disproportionate  degree,  especially  in  view  of  the  fact 
that  many  of  our  banks  and  trust  companies  are  already 
carrying  substantial  amounts  of  foreign  obligations,  and  of 
acceptances  which  they  are  under  obligation  to  renew.  The 
Board  deems  it,  therefore,  its  duty  to  caution  the  member 
banks  that  it  does  not  regard  it  in  the  interest  of  the  country 
at  this  time  that  they  invest  in  foreign  Treasury  bills  of  this 
character.  ...  In  the  opinion  of  the  Board  it  is  the  duty 
of  banks  to  remain  liquid  in  order  that  they  may  be  able  to 
respond  to  home  requirements. 

Enormous  as  were  these  loans,  they  were  insufficient, 

'^  Federal  Reserve  BtiUetin,  December,  1016,  p  661. 

70 


THE  UNITED  STATES  AS  A  NEUTRAL 

even  with  the  addition  of  the  gold  imports,  to  meet  the 
debts  which  the  European  Governments  were  piling  up  in 
the  United  States  through  their  purchases  of  munitions 
and  other  commodities.  For  the  three  years  ending 
June  30,  1917,  the  excess  of  exports  over  imports  in  the 
United  States  amounted  to  $6,860,500,000.  If  there  be 
set  against  this  sum  the  gold  imports,  the  loans  which 
had  been  granted  to  foreign  Governments,  and  an  allow- 
ance for  the  usual  charges  against  this  country  for 
interest,  freight,  insurance,  foreign  travel,  etc.,  which 
might  be  said  to  amount  in  the  aggregate  to  about 
$3,600,000,000,  there  would  still  remain  an  enormous 
unliquidated  balance.  It  was  evident  that  some  further 
expedient  would  have  to  be  devised  to  balance  the 
accounts  and  to  steady  the  rates  of  foreign  exchange. 
This  was  found  in  the  sale  to  the  United  States  of  its 
own  securities  owned  by  the  debtor  nations. 

The  amount  of  American  securities  held  abroad  has 
been  estimated  by  more  than  one  writer,  but  probably 
the  most  authoritative  statement  is  that  of  Sir  George 
Paish,  who  estimated  the  amount  of  foreign  capital 
invested  in  the  United  States  in  1910  at  about 
$6,000,000,000.*  It  is  evident  that  here  was  an  asset  of 
no  mean  magnitude  which  might  be  used  to  liquidate 
the  debts  being  created  by  European  purchasers.  There 
is  no  reason  to  suppose  that  any  noteworthy  change  had 
occurred  in  these  investments  in  the  five  years  between 
1910  and  1914.  That  we  had  not  paid  off  any  consider- 
able sums  in  this  period  is  shown  by  an  examination  of 
our  trade  balances. 

The  annual  payments  M^hich  must  be  met  by  the 
United  States  on  account  of  interest  and  other  charges 
amounted  to  about  $500,000,000,  distributed  as  follows: 

*  See  Chapter  I  for  details. 

71 


WAR  COSTS  AND  THEIR  FINANCING 

Interest  on  securities  and  other  property  incomes  $175,000,000 

Freight   charges 25,000,000 

Remittances    by   alien    laborers    living   in    United 

States 125,000,000 

Expenditures  of  American  tourists  abroad 150,000,000 

Insurance  premiums  and  sundries   25,000,000 

$500,000,000 

These  payments  were  met  by  the  excess  of  our  mer- 
chandise exports  over  our  imports,  supplemented  by 
exports  of  gold  or  additional  sales  of  American  securi- 
ties. For  the  five  fiscal  years  1910  to  1914  the  net  mer- 
chandise exports  of  the  United  States  were  as  follows : 


Merchandise  Exports  and  Imports,  1910  to  1914 

{In  millions) 


1910 

1911 

1912 

1913 

1914 

Total  exports 

Total  imports 

$1,744.9 
1,556.9 

$2,049.3 
1,527.2 

$2,204.3 
1,653.2 

$2,465.8 
1,813.0 

$2,364.5 
1,893.9 

Excess  of  exports 

.  $188.0 

$522.0 

$551 . 1 

$652.8 

$470.6 

As  the  average  for  the  five  years  is  $476,900,000,  it  is 
evident  that  the  excess  of  exports  over  imports  merely 
sufficed  to  meet  the  current  fixed  charges  against  this 
country  for  interest  and  services,  and  did  not  go  to 
reduce  our  foreign  indebtedness.  We  may  therefore 
conclude  that  this  remained  in  1914  at  pi-actically  the 
same  figure  at  which  it  stood  in  1910. 

After  the  first  panic  rush  to  sell  American  securities 
in  the  last  days  of  July,  1914,  to  which  an  end  was  put 
by  the  closing  of  the  stock  exchanges,  there  was  probably 
little  done  in  the  transfer  of  foreign-owned  securities 
to  American  accounts.  But  with  the  opening  of  the 
exchanges  again  in  November  and  December  some 
liquidation  took  place.     Unwilling  to  let  their  gold  go 

72 


THE  UNITED  STATES  AS  A  NEUTRAL 

in  unlimited  quantities,  and  faced  by  an  inability  to 
market  more  than  comparatively  small  amounts  of  their 
war  loans  in  the  United  States,  it  became  necessary  for 
the  European  Governments  to  effect  the  transfer  of 
American  securities  from  their  foreign  owners  to  the 
United  States.  It  is  difficult  to  estimate  the  amount 
of  securities  returned  to  this  country.  The  most  exten- 
sive, as  well  as  the  most  reliable,  information  on  this 
subject  is  found  in  four  inquiries  made  by  L.  F.  Loree, 
President  of  the  Delaware  &  Hudson  Company.  His 
inquiries  were  limited  to  railroad  securities,  but  it  has 
been  estimated  that  four-fifths  of  Europe's  holdings 
were  of  this  class.  The-  figures  were  obtained  from  144 
railroads,  or  from  all  lines  in  the  United  States  over 
100  miles  in  length.  The  results  of  Mr.  Loree 's  inquiries 
are  shown  in  the  following  table : 


AjiIerican  Railroad  Securities  Held  Abroad,  Par  Value 
{In  thousands) 


Type 

January 
31,  1917 

July 
31,  1916 

July 
31,  1915 

January 
31,  1915 

Preferred  stock. . 

Second  preferred 

stock 

$91,006 

4,645 
258,730 

8,475 
56,752 

57,776 
672,969 

7,450 
49 

958 

$120,598 

4,858 

366,762 

9,070 

74,797 

85,166 
774,794 

7,783 
836 

958 

$163,130 

5,609 

511,437 

24,632 

160,229 

180,591 
1,150,340 

25,253 
29 

2,201 

$204,394 

5,558 

573,880 

58,254 

187,508 

282,418 
1,371,157 

20,233 

Common  stock.  . 
Notes 

Debenture  bonds 
Collateral      trust 

bonds 

Mortgage  bonds. 
Equipment  trust 

bonds 

Car  trusts 

Receivers'  certifi- 
cates. . 

998 

Total 

$1,185,811.4 

$1,415,623.5 

$2,223,450.2 

$2,704,402.3 

73 


WAR  COSTS  AND  THEIR  FINANCING 

A  study  of  this  table  shows  that  in  the  lialf-year 
eiKling  July  31,  191G,  almost  $500,000,000  of  railroad 
securities  were  transferred  from  foreign  to  American 
ownership.  The  next  12  months  saw  a  further  transfer 
of  about  $800,000,000,  but  the  ensuing  6  months  end- 
ing January  31,  1917,  saw  only  $230,000,000  of  railroad 
securities  thus  transferred.  It  is  evident  that  the  well 
was  running  dry. 

Large  as  was  the  first  sum,  it  was  not  sufficient  to 
meet  the  increase  in  war  purchases  made  l)y  the 
belligerents  from  this  country,  and  early  in  1916  Gov- 
ernment pressure  began  to  be  applied  to  force  the 
liquidation  of  America.^  securities.  The  first  plan 
devised  was  the  British  mobilization  scheme,  which  was 
put  into  effect  in  January,  1916.  This  provided  for  the 
concentration  in  the  possession  of  the  Britisli  Govern- 
ment of  American  securities  owned  by  British  subjects. 
The  owners  were  given  several  options:  the  first 
provided  for  the  outright  sale  of  the  securities  to  the 
Government  in  exchange  for  British  Exchequer  bonds ; 
the  second  provided  for  the  loan  of  securities  by 
those  unwilling  to  sell  them.  In  the  latter  case  the 
owner  was  to  deposit  them  with  the  Government  for  a 
period  of  five  years  after  March  31,  1917,  with  an  elec- 
tion on  the  part  of  the  Government  to  purchase  if  it  so 
desired,  the  owner  meanwhile  to  receive  the  interest  or 
dividends  and  a  payment  from  the  British  Government 
for  the  loan  of  one-half  of  one  per  cent,  on  the  par  value 
of  the  securities.  If  the  securities  were  purchased,  the 
owner  received  the  income  and  bonus  to  the  end  of  the 
loan  period,  and  then  either  received  back  the  same 
type  of  security  or  its  deposit  value  and  a  five  per  cent, 
bonus. 

France  also  asked  its  people  who  held  American  and 
74 


THE  UNITED  STATES  AS  A  NEUTRAL 

other  foreign  securities  to  deposit  them  with  the  Gov- 
ernment on  a  three-year  loan  subject  to  the  right  of 
purchase  by  the  Government,  in  which  event  the  owner 
would  be  paid  the  highest  price  quoted  for  his  security 
during  the  prior  three  months.  The  Government 
secured  to  the  owners  the  full  income  from  the  securities 
while  on  loan  with  it  and  in  addition  a  bonus  of  25  per 
cent,  of  the  income  which  the  securities  earned  during 
that  period. 

Germany  also  mobilized  the  securities  of  her  citizens, 
both  foreign  and  domestic.  Through  the  agency  of  the 
loan-office  banks  the  people  were  induced  to  pledge  these 
securities  for  the  purchase  of  war  loans.  Because  of 
the  British  blockade  it  was  never  possible  for  Germany 
or  Austria-Hungary  to  utilize  their  holdings  of  Ameri- 
can securities  for  the  liquidation  of  foreign  debts  or  the 
establishment  of  credits  in  the  United  States,  although 
some  were  transferred  to  Holland  and  the  Scandinavian 
countries,  from  which  Germany  purchased  during  the 
early  years  of  the  war.  Germany  during  the  first  and 
second  war  loans  in  the  fall  of  1914  and  spring  of 
1915  liquidated  her  foreign  securities  heavily  through 
Amsterdam.^ 

The  securities  thus  mobilized  by  the  belligerent 
Governments  were  used  in  part  as  collateral  for  loans 
placed  in  the  United  States,  as  in  the  case  of  the 
American  Foreign  Securities  Company  loan  and  the 
British  collateral  loans  of  August  and  October,  1916. 
Over  $500,000,000  of  securities,  of  which,  to  be  sure. 

"Tn  May,  1918,  the  Dutch  Minister  of  Finance  stated  that. 
accordin<r  to  his  best  information,  foreiirn  securities  to  the  valup 
of  200,000.000  florins  ($80,000,000,  at  the  prevailincr  rate  of  21/2 
florins  to  the  dollar)  had  been  imported  into  Holland  since  Janu- 
ary 1,  1917  {Commerce  Reports.  July  2,  1918,  p.  201.  It  is  prob- 
able that  the  early  years  of  the  war  saw  a  similar  movement 
even  greater  in  amount. 

75 


WAR  COSTS  AND  THEIR  FINANCING 

only  a  small  part  represented  investments  in  the  United 
States,  Avere  tied  up  in  this  way  as  collateral.  More 
important  Avas  the  outright  sale  of  these  holdings  in  the 
American  market  and  the  application  of  the  proceeds  to 
new  purchases  or  the  liquidation  of  debt. 

The  result  of  this  double  movement  of  gold  and 
securities  from  Europe  to  the  United  States,  together 
with  the  granting  of  loans  and  the  sale  of  our  products 
in  enormous  amounts  at  high  prices,  was  the  rapid 
repayment  of  our  net  debt  to  foreign  countries.  It  may 
be  estimated  that  by  the  middle  of  1917  our  net  debt  to 
foreign  countries  was  practically  extinguished.  For  the 
first  time  in  its  history  the  United  States  became  a 
creditor  nation. 

The  position  achieved  by  the  United  States  as  a  creditor 
nation  gave  rise  to  statements  and  hopes  that  New  York 
would  now  supplant  London  as  the  financial  center 
of  the  world.  A  brief  statement  of  the  factors  neces- 
sary to  obtain  and  hold  such  a  position  will  answer  the 
question  whether  New  York's  financial  supremacy  was 
simply  one  of  the  temporary  incidents  of  the  war  or 
whether  it  is  to  be  permanent. 

It  is  clear  that  the  position  of  the  United  States  and 
of  New  York  as  its  leading  financial  city  was  abnormal 
in  1916.  To  be  sure,  the  United  States  had  paid  off  its 
borrowed  indebtedness  and  was  piling  up  an  enormous 
credit  balance  against  the  rest  of  the  world.  But  to  be 
a  creditor  nation  is  a  very  different  thing  from  being 
the  financial  center  of  the  world.  To  become  such  a 
center  permanently  several  conditions  must  be  met.  In 
the  first  place  the  American  people  must  invest  large 
sums  abroad.  To  do  this  they  must  not  only  have  capi- 
tal to  spare  for  that  purpose,  but  they  must  be  willing 

76 


THE  UNITED  STATES  AS  A  NEUTRAL 

to  invest  it  in  other  countries.  The  first  question  that 
must  be  answered,  therefore,  is  whether  the  United 
States  has  any  surplus  capital  which  it  can  spare  after 
meeting  the  requirements  of  domestic  industries  and 
new  enterprises.  Five  years  ago  such  a  query  would 
have  been  unhesitatingly  answered  in  the  negative,  but 
the  events  of  the  war  have  shown  that  our  powers  of 
production  are  far  in  excess  of  our  own  immediate 
demands.  The  Census  Bureau  estimated  the  increase  in 
the  total  wealth  of  this  country  at  about  $80,000,000,000 
in  the  eight  years  between  1904  and  1912,  or  from 
$107,104,193,410  to  $187,739,071,090.  This  was  at  the 
rate  of  about  $10,000,000,000  a  year;  if  we  exclude  the 
increase  in  the  value  of  land,  the  annual  gain  was  about 
$6,000,000,000.  In  a  recent  study  David  Friday  con- 
cliides  that  the  annual  savings  of  the  American 
people  during  the  years  1916  and  1917  were  about 
$11,500,000,000.«  It  is  evident,  if  these  figures  be  even 
approximately  correct,  that  there  has  been  an  enormous 
gain  in  productive  capacity,  even  after  making  due 
allowance  for  the  change  in  price  level,  which  should 
furnish  a  fund  with  wiiich  we  can  finance  not  only  our 
own  requirements,  but  out  of  which  we  can  also  make 
loans  to  the  rest  of  the  world. 

At  present  the  United  States  is  in  a  peculiarly 
favored  position.  A  large  part  of  the  abnormal  earn- 
ings from  war  industries  has  gone  into  the  improve- 
ment and  enlargement  of  existing  plants.  Although  the 
railroads  were  run  down  at  the  beginning  of  the  war, 
they  have  since  been  in  some  measure  rehabilitated,  and 
in  any  case  further  requirements  for  equipment  will 
not   absorb   the   total  available   surplus    capital.     The 

* "  War  and  tlie  Supply  of  Capital,"  American  Economic  Revievf, 
ix,  No.  1,  Supplement,  March,  1919,  p.  92. 

77 


WAR  COSTS  AND  THEIR  FINANCING 

domestic  demand  for  capital  for  investment  may  be 
indicated  by  the  record  of  new  security  issues  during 
the  years  1910  to  1916,  as  shown  in  the  following  table: 

New  Securities  Issued  in  the  United  States 
{In  millions) 


Corporate 

Municipal, 
etc. 

Total 

1910   

$3,486 
3,577 
4,549 
3,180 
2,331 
1,962 
3,421 

$320 
397 
386 
403 
466 
488 
333 

$3,806 

1911 

3,974 

1912 

4,935 

1913 

3,583 

1914 

2,797 

1915 

2,450 

1916 

3,754 

The  balance  of  the  $6,000,000,000  which  it  was  esti- 
mated above  was  saved  annually  by  the  people  of  the 
United  States  and  which  did  not  take  the  form  of  corpo- 
rate and  other  securities,  was  invested  in  farm  equip- 
ment, new  houses  and  buildings,  the  establishment  of 
individual  businesses,  etc.  Even  allowing  for  a  consid- 
erable expansion  in  each  of  these  items,  it  seems  clear 
that  with  the  increased  production  on  the  part  of  the 
people  of  the  United  States  it  would  be  possible  to  meet 
all  home  needs  and  yet  have  a  surplus  for  investment 
abroad. 

The  need  of  further  capital  for  investment  in  Ameri- 
can industry  is  conditioned  in  large  measure  on  the 
available  supply  of  labor.  Although  the  labor  force  has 
been  increased  by  the  addition  of  a  great  many  women 
who  formerly  were  not  engaged  in  gainful  occupations 
or  who  were  employed  in  domestic  service,  it  is  not 
certain  that  they  will  remain  permanently  in  productive 
work.    In  this  connection  too  it  must  not  be  overlooked 

78 


THE  UNITED  STATES  AS  A  NEUTRAL 

that  the  man  power  of  Europe  from  which  we  liave 
drawn  so  largely  in  the  past  has  been  frightfully 
reduced  by  the  war,  and  that  we  ourselves  have  erected 
a  barrier  against  its  free  immigration  by  the  imposition 
of  a  new  literacy  restriction.  It  may  fairly  be  admitted 
in  view  of  all  these  facts  that  the  United  States  has 
the  capacity  for  foreign  investment  and  the  ability  to 
finance  foreign  trade.  The  further  question  arises 
whether  its  people  have  the  willingness  to  utilize  their 
resources  in  this  way. 

Before  New  York  can  aspire  to  the  position  of  world 
center,  it  must,  as  one  writer  puts  it,  "  learn  to  think 
internationally,  and  not  provincially."  Americans  had 
never  before  the  World  War  been  willing  to  make  any 
considerable  investments  in  foreign  countries.  If,  how- 
ever,  we  are  to  take  from  England  her  supremacy  in  the 
world's  money  market,  tliis  is  the  first  condition  that 
must  be  met.  The  situation  has  been  well  described  as 
follows  :'^ 

In  order  permanently  to  fix  a  new  place  for  ourselves,  we 
must  really  become  a  world  trade  center.  Time  will  show 
Avhether  we  are  sufficiently  developed  for  that.  To  ship  to 
world  markets  and  cultivate  them  permanently  for  our  manu- 
factures and  merchants,  we  must  become  lenders  of  wealth  on 
a  big  scale.  One  of  the  most  familiar  axioms  of  international 
trade  is  that  commerce  will  flow  where  the  capital  flows;  one 
reason  for  European  supremacy  in  overseas  trade  has  been 
the  tremendous  outside  investments  made  by  England  and 
France  and  more  recently  by  Germany.  Our  people  are  not 
yet  educated  to  loan  money  abroad  in  large  quantities;  in 
spite  of  our  apparently  large  loans  in  the  past  eighteen 
months,  we  cannot  yet  be  called  in  a  true  sense  an  inter- 
national loan  market. 


"  Report  issued  by  the  Mechanics  and  Metals  National  Bank  of 
New  York,  quoted  in  Annals  of  the  American  Academy  of  Politi- 
cal and  Social  Science,  November,  1916,  p.  276. 

79 


WAR  COSTS  AND  THEIR  FINANCING 

A  third  factor  that  must  be  considered  is  the  baDking 
and  credit  machinery  for  financing  foreign  trade.  In 
this  respect  London  has  an  enormous  advantage  over 
New  York.  As  has  already  been  pointed  out,  London 
banks  had  for  many  years  furnished  banking  accommo- 
dations to  importers  and  exporters  the  world  over.  Ster- 
ling exchange  was  an  international  currency,  and  trans- 
actions between,  let  us  say,  an  Argentine  exporter  of  hides 
and  a  New  York  merchant  Avould  normally  be  settled 
by  a  draft  drawn  on  London.  The  same  thing  was  true 
of  European  and  Oriental  countries.  Before  the  war 
foreigners  engaged  in  import  or  export  trade,  even  with 
the  United  States  itself,  seldom  thought  of  settling  their 
claims  by  means  of  New  lork  drafts.  Fortunately  the 
passage  of  the  Federal  Reserve  Act  has  made  it  possible 
for  American  banking  institutions  to  utilize  their  credit 
in  financing  export  trade.  Great  progress  has  also  been 
made  in  the  use  of  trade  acceptances.  INIoreover,  closer 
connection  between  the  United  States  and  foreign 
countries,  especially  with  those  of  Latin  America,  has 
been  secured  by  the  establishment  of  branches  or 
agencies  of  American  banks  in  those  countries  and  by 
the  opening  in  the  United  States  of  accounts  by  foreign 
banks  or  exporters  in  other  countries. 

Whether  these  are  mere  temporary  incidents  of  the 
abnormal  conditions  connected  with  the  war,  or  are 
evidences  of  a  permanent  shift  in  international  finance 
can  be  determined  onlj^  by  time.  It  may  be  said,  how- 
ever, that  New  York  has  not  yet  successfully  met  the 
essential  requisite  to  supremacy  in  the  world  trade, 
namely,  that  of  developing  an  active  discount  market. 
In  this  respect  London  has  yielded  little  to  New  York 
even  after  four  years  of  war.  In  November,  1918,  it 
was  stated  that  the  amount  of  acceptances  of  all  the 

80 


THE  UNITED  STATES  AS  A  NEUTRAL 

London  banks  against  international  business  amounted 
to  about  $500,UU0,0U0,  while  those  of  the  New  York 
institutions  totalled  only  $210,000,000.^  Although  the 
United  States  was  able  to  loan  great  sums  to  the  Euro- 
pean Allies  and  in  large  measure  to  finance  the  w^ar  in 
its  later  stages,  New  York  had  not  been  able  to  wrest 
from  London  the  business  of  financing  the  international 
trade  of  the  world.  The  habits  and  trade  connections 
and  specialized  training  of  a  century  or  more  were  not 
lightly  to  be  overcome. 

A  more  fundamental  factor  in  determining  whether 
the  people  of  the  United  States  will  be  willing  to  lend 
their  capital  to  Europe  permanently  and  on  a  large 
scale  remains  to  be  considered.  The  final  test  is  after 
all  whether  larger  profits  are  to  be  made  in  Europe 
or  in  the  United  States.  Up  to  this  time  the  returns  on 
investments  in  this  country  have  always  been  larger 
and  European  capital  has  flowed  here  to  take  advantage 
of  the  high  rates.  It  is  certain  that  opportunities  for 
f aA^orable  investment  have  by  no  means  been  exhausted ; 
but  until  they  are,  or  until  greater  scarcity  of  capital 
in  Europe  causes  rates  of  interest  to  be  higher  there 
than  here,  no  permanent  flow  of  capital  seeking  invest- 
ment can  be  expected  to  take  place  from  the  United 
States  to  Europe.  As  a  market  for  cheap  capital  it  is 
unlikely  that  London  will  yield  its  place  to  New  York 
within  any  brief  period  of  time. 

*  Leopold  Frederick,  quoted  in  Federal  Reserve  Bulletin,  Janu- 
ary, 1919,  p.  21. 


CHAPTER  IV 


WAR  EXPENDITURES 


The  cost  of  past  wars  —  Expenditures  in  the  United  States  — 
Expenditures  in  Great  Britain  —  Expenditures  in  France, 
Russia,  and  Italy  —  Expenditures  in  Germany  and  Austria- 
Hungary  —  Comparative  estimate  of  total  war  expenditures. 

A  discussion  of  the  expenditures  of  the  World  War 
must  necessarily  deal  to  a  considerable  extent  with  esti- 
mates and  guesses.  Even  in  peace  time  the  budgets  of 
many  of  the  belligerent  countries  left  much  to  be  desired 
in  clarity  and  comprehensiveness,  and  war  conditions 
did  not  improve  this  condition.  Different  methods  of 
accounting  in  the  various  countries  make  comparisons 
difficult.  Nor  is  it  always  easy  to  determine  exactly 
what  are  war  expenditures.  In  most  of  the  countries 
certain  ordinary  expenditures  which  had  previously 
been  carried  in  the  civil  budget  were  transferred  to  the 
military  side;  in  others  the  deficits  caused  by  disor- 
ganization of  industry  and  the  falling  off  of  revenue 
were  charged  up  to  war  costs.  Moreover,  there  have 
been  imposed  upon  the  ordinary  budget  many  additional 
expenditures  which  are  directly  attributable  to  the  war, 
such  as  allotments  to  the  families  of  soldiers  and  sailors, 
pensions  to  families  the  breadwinners  of  which  have 
been  killed  or  disabled,  the  interest  on  the  war  debt, 
and  the  increasing  cost  of  government  itself  due  to  the 
general  inflationist  policy  of  financing  the  war.  Finally, 
not  all  of  the  countries  have  published  complete  or 
veracious  statements  of  their  expenditures.  Great 
Britain.  France,  Italy,  and  the  United  States  are  the 

82 


WAR  EXPENDITURES 

only  countries  that  have  published  reports  at  all  com- 
prehensive of  their  war  expenditures  and  of  the  means 
adopted  to  meet  them.  In  the  case  of  the  other 
countries  reliance  must  be  placed  upon  the  votes  of 
credit  and  war  loans  in  estimating  war  expenditure. 

Before  describing  the  actual  expenditures  made  dur- 
ing the  World  War  it  will  be  interesting  to  note  some  of 
the  estimates  which  had  been  made  in  advance  as  to  the 
probable  cost  of  such  a  conflict.  Not  a  few  such  esti- 
mates were  made  during  the  first  decade  of  the  twentieth 
century,  usually  for  the  purpose  of  proving  the  impossi- 
bility of  enduring  the  crushing  costs.  The  average  cost 
per  man  was  usually  set  down  at  about  $2.50  per  day 
and  the  daily  expenditures  were  figured  out  according 
to  the  number  of  men  involved.  The  resulting  total 
depended  in  considerable  measure  upon  the  imagination 
of  the  writer  and  his  guess  as  to  the  number  of  par- 
ticipants who  would  be  drawn  into  the  conflict.  An 
Austrian  economist  figured  that  a  European  war  involv- 
ing France,  Germany,  Russia,  and  Austria-Hungary 
would  cost  about  $18,000,000  daily.  The  French  writer, 
Bloch,  estimated  the  total  daily  expenditure  for  these 
four  Powers  and  Great  Britain  at  about  $21,000,000  a 
day.  A  Swiss  estimate  made  in  September,  1914,  after 
some  hint  had  already  been  given  as  to  the  magnitude 
of  the  expenditures,  set  the  total  daily  cost  for  the  four 
nations  first  named  at  $37,500,000.  A  computation 
made  at  the  time  of  the  Balkan  wars,  with  perhaps  a 
more  intimate  knowledge  of  the  possibilities  involved, 
put  the  actual  expense  of  a  general  European  conflict 
at  $55,000,000  a  day.  The  expenditures  of  any  one  of 
the  five  principal  belligerents  exceeded  any  of  these 
estimates  except  the  last,  and  this  was  outdone  by  the 
combined  expenditures  of  any  two  of  these  belligerents. 

83 


WAR  COSTS  AND  THEIR  FINANCING 

It  is  evident  tliat  even  in  the  years  immediately  pre- 
ceding the  outbreak  of  the  World  War  the  frightful 
financial  consequences  of  a  general  European  conflict 
were  not  appreciated.  The  improvements  that  had  been 
made  in  the  machinery  of  destruction,  the  possibilities 
of  airplanes  and  submarines,  the  economic  mobilization 
of  whole  peoples  for  w^ar,  and  the  enormous  expense 
involved  seem  to  have  been  glimpsed  but  dimly.  From 
the  standpoint  of  costs,  as  well  as  from  almost  every 
other  point  of  view,  the  World  War  established  a  new 
record  and  occupies  a  unique  position.  The  characteris- 
tic feature  of  the  expenditures  in  this  war  was  the 
prodigality  and  even  wastefulness  with  which  they  were 
incurred.  As  it  was  the  first  war  in  which  modern 
technical  science  pitted  machines  and  the  output  of 
factories  against  the  forces  of  the  enemy,  the  instruments 
and  munitions  of  warfare  were  produced  and  destroyed 
with  a  reckless  prodigality  which  ran  the  costs  up  to 
incredible  figures.  Moreover,  the  greater  the  perfection 
of  science,  the  more  enormous  became  the  expenditure. 
As  Professor  Seligman  wrote  after  our  own  entrance 
into  the  conflict  :^ 


Not  only  arc  these  munitions  infinitely  more  costly  than  in 
former  times,  but  also  less  durable;  the  bigger  the  gun,  the 
shorter  its  life;  the  more  elaborate  the  aeroplane,  the  greater 
the  chance  of  its  destruction;  the  better  the  sanitary  methods, 
the  more  frequent  the  casting  aside  of  uniforms;  the  more 
complete  the  application  of  science,  the  more  rapid  the  ravages 
of  war  by  both  land  and  sea.  Not  only  are  the  initial 
expenses  immenseh^  greater,  but  the  sheer  waste  by  destruc- 
tion grows  with  every  forward  step  in  efficiency.  The  pres- 
ent war  is  not  only  the  most  expensive  of  all  Avars,  but  also 
the  most  wasteful. 

^  E.  R.  A.  Seligman,  "Our  Fiscal  Policy,"  in  Financial  Mohili- 
sation  for  War  (Chicago,  1917),  p.  1. 

84 


WAR  EXPENDITURES 

Financial  efSciency  as  well  as  teelmical  skill  was  also 
responsible  for  the  huge  outlays.  The  ease  with  which 
money  was  secured  from  the  banks  and  from  the  public 
engendered  a  false  optimism  with  regard  to  fiscal  prob- 
lems and  encouraged  lavish  expenditures.  Economy  was 
disregarded,  for  in  matters  so  vital  and  so  urgent  no 
chances  could  be  taken.  The  figures  soon  became  so 
large  that  all  sense  of  proportion  was  lost,  and  men 
spoke  as  glibly  of  billions  as  they  had  previously  of 
thousands. 

In  gauging  the  magnitude  of  the  costs  of  the  World 
War  a  comparison  with  the  costs  of  the  more  important 
wars  of  the  nineteenth  century  will  be  enlightening. 
These  are  stated  in  the  following  table,  together  with 
their  duration  and  loss  of  life : 


Costs  of  Nineteenth  Century  Wars^ 

Wars 

Days 

Loss  of  Life 

Direct 
Monetary  Cost 

Napoleonic,  1790-1815 

Crimean,  1854 

American  Civil,  1861-65 

North 

9,000 

730 

1,350 

2,100,000 

785,000 
656,000 

*$3,070,000,000 
1,700,000,000 

4  700  000  000 

South 

2300000  000 

210 

280,000 

'       '       ' 

Franco-Prussian,  1870-71 .... 
France 

7,000,000,000 
2  535  000  000 

Germany 

675,000,000 

3,210,000,000 
1 ,250,000,000 
2,100,000,000 

Boer,  1899-02     . 

995 

548 



9,800 
160,000 

Russo-Japanese,  1904-05..  .  . 

2  E.  Crammond,  "Cost  of  the  War,"  Journal  of  the  Royal  Sta- 
tistical Society,  May,  1915,  p.  361;  F.  W.  Hirst,  Political  Economy 
of  War,  pp.  140,  147,  241,  274,276. 

*Increase  in  debt  of  Great  Britain  and  France. 

85 


WAR  COSTS  AND  THEIR  FINANCING 

Although  we  were  the  last  of  the  major  belligerents 
to  enter  the  war,  the  expenditures  of  the  United  States 
at  once  rivalled  and  soon  surpassed  in  magnitude  those 
of  the  other  countries.  Within  a  month  after  the 
declaration  of  war  on  April  6,  1917,  the  war  expendi- 
tures were  reflected  in  the  monthly  statements  of  the 
Treasury.  These  are  shown  for  the  two  years  1917 
and  1918  in  the  following  table,  excluding  advances  to 
the  Allies : 

Monthly  Expenditures  of  the  United  States,  1917-1918 


Month 

1917 

1918 

Monthly 

DaUy 

Monthly 

Daily 

January. .  .  . 
February. .  . 

March 

April 

May 

June 

July 

August 

September. . 
October. .  .  . 
November . . 
December . . 

$79,910,714 

75,844,498 

72,773.903 

81.599,598 

114,102,810 

134,304,040 

208,299,031 

277,4.38,000 

349,013,305 

465,045,360 

512,952,035 

611,297,425 

$2,577,765 

$2,708,406 

2,347,545 

2,719,986 

3,680,736 

4.776.801 

6.719,323 

8,949,613 

11,337.768 

14.904.690 

17,098,401 

14,904,690 

$715,302,039 

675,209,068 

819,955,367 

910,756,7.58 

1,068,203,026 

1,263,914,905 

1,259,782,-599 

1,524,901,777 

1.624.583,411 

1,174.622.406 

1.655.051.004 

1.670.890.396 

$23,074,260 
24.114,610 
26,450,173 
30,358.558 
34,458,163 
42,130,497 
40,638,310 
49,190,380 
54,152,780 
37,892,335 
55,168,366 
53,899,690 

There  is  seen  here  the  same  steady  increase  that 
characterized  expenditures  in  other  countries,  as  the 
administrative  and  other  machinery  was  created  for 
training  men,  producing  munitions  and  other  war  sup- 
plies, building  ships,  and  organizing  in  manifold  ways 
the  resources  of  the  nation  for  the  winning  of  the  war. 
It  is  not  yet  possible  to  tell  exactly  how  this  money  was 

86 


WAR  EXPENDITURES 

spent,  as  detailed  accounts  were  not  published  during 
the  war  itself  for  obvious  military  reasons,  and  suffieit'iit 
time  has  not  elapsed  since  the  signing-  of  the  Armis- 
tice to  permit  such  publication.  An  approximate 
idea  may  be  secured,  however,  from  a  statement  of  th« 
expenditures  by  main  groups  for  the  three  fiscal  years 
1917,  1918,  and  1919,  together  with  those  of  the  last 
jieace  year.     These  are  given  in  the  following  table : 

Expenditures  of  the  United  States,  1013  to  1919 


Estab- 
lish- 
ment 

1916 

1917 

1918 

1919 

Civil.... 
Military 
Naval .  . 
Pen- 
sions, 
interest, 
etc 

.$204,038,737 
164,635,576 
155,029,425 

200,799,260 

$234,649,248 
440,276,880 
257,166,437 

215,806,426 

$1,507,367,481 
5,684,348,623 
1,368,642,703 

406,173,369 

$3,230,890,248 
9,253,059,384 
2,009,272,389 

872,075,375 

$724,502,998 

$1,147,898,991 

$8,966,532,266 

$15,365,297,396 

The  expenditures  attributable  to  war  may  be  calcu- 
lated by  subtracting  the  sum  spent  during  the  fiscal 
year  1915-16,  which  may  be  regarded  as  normal,  from 
the  total  expenditures  of  the  following  years,  assuming 
the  difference  to  be  due  to  the  war.  This  procedure 
shows  war  expenditures  for  the  first  three  months  of 
the  war  (April  6  to  June  30,  1917)  to  have  been 
$423,405,993;  those  for  the  fiscal  year  1917-18  would 
be  $8,242,039,268 ;  and  those  for  the  fiscal  year  1918-19 
may  be  placed  at  $14,312,821,707  or  a  total  of  $22,978,- 
266,968.    If  to  these  sums  there  be  added  the  advances 

87 


WAR  COSTS  AND  THEIR  FINANCING 

to  the  Allies,  the  total  outlay  on  account  of  the  war 
made  by  the  Federal  Government  for  the  fiscal  years  1917. 
1918,  and  1919  was  $1,308,405,993,  $12,981,474,018, 
and  $17,790,386,957  respectively,  or  a  total  of  $32,080,- 
266,968.=^ 

Large  as  were  these  sums,  they  had  been  exceeded  by 
the  plans  of  the  Administration  and  the  appropriations 
of  Congress.  The  needs  of  the  Government  for  the  fiscal 
year  1918  were  estimated  at  $18,775,910,955,  and  the 
appropriation  bills  passed  in  response  to  these  estimates 
carried  a  total  of  $18,879,177,015,  to  which  must  be 
added  $2,511,553,925  for  contract  work  authorized.  There 
is  a  wide  discrepancy  between  these  sums  and  the  actual 
expenditures  of  $13,705,967,016  which  were  shown  at 
the  end  of  the  year.  The  overstatement  made  in  the 
estimates  must  be  attributed  to  the  belief  that  the 
resources  of  the  country  could  be  at  once  mobilized  for 
war  purposes.  But  it  soon  became  evident  that  con- 
siderable time  must  elapse  and  much  preparatory  work 
be  done  before  such  enormous  sums  could  be  spent 
advantageously.     Men  who  had  laughed  at  the  idea  of 

^The  essential  correctness  of  this  calculation  is  shown  by  the 
following  statement  from  a  letter  written  by  the  Secretary  of  the 
Treasury,  Carter  Glass,  to  Congressman  Fordney,  Chairman  of 
the  House  Committee  on  Ways  and  Means,  on  July  9,  IfllO: 

"  Expenditures  for  the  war  period  amounted  to  $32,427,000  000. 
and  of  these  more  than  $9,384,000,000,  or  about  29  per  cent., 
were  met  out  of  the  receipts  and  other  revenues  than  borrowed 
money,  although  payment  of  nearly  half  of  the  income  and  profits 
taxes  for  the  fiscal  year  1919  has  not  yet  been  made,  such  pay- 
ment being  deferred  until  the  fiscal  year  1920.  In  this  calcula- 
tion no  deduction  is  made  of  expenditures  for  loans  to  the  Allies, 
which  on  June  30  amounted  to  $9,102,000,000.  or  for  other  invest- 
ments, such  as  ships,  stock  of  the  War  Finance  Corporation, 
bonds  of  the  Federal  land  banks,  etc. 

"  If  we  assume  that  the  expenditures  of  the  Government  on  a 
peace  basis  Avould  have  been  at  the  rate  of  $1,000,000,000  a  year, 
or  for  the  period  under  discussion  of  nearlv  twentv-seven  months 
would  have  equaled  $2,250,000  000.  then  we  mav  estimate  the 
gross  cost  of  the  war  to  June  30,  1919,  at  $30,177,000,000." 


WAR  EXPENDITURES 

**  a  million  men  springing  to  arms  between  sunrise  and 
sunset  "  were  now  to  learn  that  it  was  equally  impos- 
sible to  spend  a  billion  dollars  a  month  for  war  purposes 
without  adequate  preparation.  In  fact,  a  full  year  was 
to  elapse  before  the  labor  and  industries  of  the  country 
were  fully  mobilized,  and  the  highest  pitch  of  production 
was  probably  just  being  attained  when  the  Armistice 
put  an  end  to  further  preparations. 

It  will  be  noticed  in  the  table  on  page  86  that  the 
month  of  November,  1918,  showed  the  highest  daily 
expenditures  chronicled  during  the  war,  although 
December  registered  a  greater  absolute  sum  for  the 
month.  This  was  due  to  the  cancellation  of  war  con- 
tracts, which  went  on  rapidly  for  two  months.  There- 
after expenditures  showed  an  appreciable  and  steady 
decline.  But  the  heavy  expenditures  of  these  months 
may  fairly  be  attributed  to  the  war,  as  they  were  caused 
by  the  cost  of  demobilization  and  similar  charges  which 
could  not  suddenly  be  discontinued. 

One  of  the  striking  features  of  war  finance  was  the 
almost  universal  breakdown  of  constitutional  budgetary 
procedure.  Even  in  England,  where  the  control  of  the 
purse  by  Parliament  had  been  carried  furthest,  wide 
discretionary  powers  were  given  to  the  Executive  to 
spend  the  money  voted  free  from  the  usual  control.  Of 
conditions  as  they  existed  just  prior  to  the  war  a  recent 
careful  study  says:*  "  The  most  characteristic  feature 
of  the  appropriation  system  of  Great  Britain  is  the 
extent  to  which  discretion  is  still  left  to  the  Executive 
in  respect  to  the  expenditure  of  the  funds  granted." 
The  power  of  Parliament  Avitli  respect  to  expenditures 

*W.  F.  Willoiishby,  W.  W.  Willouohby  and  S.  McC.  Lindsay, 
Financial  Administration  of  Great  Britain  (New  York,  1917), 
p.  27. 

89 


WAR  COSTS  AND  THEIR  FINANCING 

Avas  theoretically  unlimited,  but  it  had  always  permitted 
considerable  discretion  to  the  Executive  because  it  was 
believed  that  the  latter  was  in  a  better  position  to  deter- 
mine the  details  and  to  secure  efficiency.  During  the 
war  this  principle  was  stretched  to  an  extent  undreamed 
of,  and  enormous  votes  of  credit  were  granted  without 
any  determination  as  to  the  details  of  expenditures  or 
control.  A  vote  of  credit  is  a  "  vote  having  for  its 
purpose  the  placing  at  the  disposition  of  the  Ministry 
of  a  large  sum  of  money  in  addition  to  that  provided 
for  the  regular  conduct  of  the  Government,  with  which 
to  meet  some  great  emergency."^  In  voting  for  war 
expenditures  Parliament  throughout  the  whole  of  the 
war  made  use  of  this  method  of  granting  votes  of  credit. 
In  this  way  publicity  with  regard  to  the  purposes  and 
details  of  the  military  expenditures  was  avoided.  It  is 
therefore  not  possible  to  analyze  the  British  war  ex- 
penditures in  detail. 

On  the  other  hand,  the  gross  accounts  of  the  war 
expenditures  were  published  regularly  since  the  begin- 
ning of  the  war.  These  are  shown  below  for  the  fiscal 
years  ending  ]\Iarch  31,  1914  to  1919,  the  expenditures 
of  the  last  peace  year  being  given  by  way  of  comparison  : 

Expenditures  of  Great  Britain 

1913-14  $987,465,000 

1914-15  2.802,367.663 

1915-16  7,795,791.88s 

1916-17  10,990.563,550 

1917-18  13,481,107,025 

1918-19  13.896,505,940 

There  is  evidenced  here  a  steady  growth  in  expendi- 
ture whicli  was  utterly  without  precedent  in  former 
wars  and  which  was  as  unexpected  as  it  was  unwelcome. 

"  Ihid.,  p.  128. 

90 


WAR  EXPENDITURES 

Month  after  month  antl  year  after  year  the  reality  out- 
ran the  forecast;  never  did  the  hudget  equal  the  actual 
outlay.  The  imaginations  of  the  Chancellors  of  the 
Exchequer  did  not  seem  able  to  cope  with  the  increasing 
magnitude  of  the  operations  and  the  constant  demand 
for  new  services.  The  defect,  however,  was  not  peculiar 
to  Great  Britain  but  was  shared  by  all  the  belligerents. 
In  the  ease  of  Great  Britain  large  loans  to  her  allies 
and  to  the  British  Dominions  were  in  part  responsible 
for  the  progressive  increase,  but  primarily  it  was  due 
to  the  putting  of  larger  armies  into  the  field  and  to 
increased  production  of  munitions.  Toward  the  end  of 
the  war,  too,  the  effect  of  higher  prices  was  reflected 
in  the  increased  cost  of  all  war  operations.  The  increase 
is  shown  even  more  strikingly  when  the  daily  expendi- 
tures are  compared.  In  the  following  table  these  are 
given  by  quarters  for  the  period  of  the  war : 


Daily  War  Expenditures  of  Great  Britain  by 
191-4-1918 

Quarters, 

Period 

Days 

EXPEISrDITURE.S 

Quarter 

Per  day 

Aug.  4-Sept.     30,1914... 
Oct    1-Dec.      31,1914... 
Jan.    1-March  31,  1915.  .  . 
April  1-June     30,  1915 .  .  . 
July  1-Sept.     30,  1915 .  .  . 
Oct.   1-Dec.     31,  1915.  .  . 
Jan.   1-March  31,  1916.  .. 
April  1-June     30,1916... 
July  1-Sept.     30,  1916.  .  . 
Oct.   1-Dec.     31,  1916... 
Jan.  1-March  31,  1917.  .. 
April  1-June     30,  1917.  .  . 
July  1-Sept.     30,  1917... 
Oct.   1-Dec.     31,  1917.  .  . 
Jan.   1-March  31,  1918... 
April  1-June     30,  1918 .  .  . 
July  1-Sept.     30,  1918 .  .  . 

58 
92 
90 
91 
92 
92 
91 
91 
92 
92 
90 
91 
92 
92 
90 
91 
92 

$351,155,000 
930,490,000 
1,202,890,000 
1,292,365,000 
2.080,120,000 
2,127,100,000 
2,297,205,000 
2,222,800,000 
2,301,210,000 
3,305,585,000 
3,160,970,000 
3,356,435,000 
3,283,830,000 
3,505,905,000 
3,333,931,715 
3,174,515,000 
3.152,794,150 

$5,975,000 
10,115,000 
13,365,000 
14,200,000 
22,610,000 
23,120,000 
25,230,000 
24,425,000 
25,015,000 
35,9.30,000 
35,620,000 
36,885,000 
35,695,000 
38,105,000 
37,043,686 
,34,884,780 
34,269,000 

91 


WAR  COSTS  AND  THEIR  FINANCING 

The  end  of  the  first  fiscal  year,  March  31,  1915,  saw 
the  daily  expenditures  doubled,  a  process  which  was 
repeated  in  the  second  year.  Every  effort  was  made  to 
cut  down  civil  expenditures.  The  Road  Improvement 
Fund  was  abandoned  and  appreciable  savings  were  made 
in  the  Consolidated  Fund  service  by  suspending  the 
sinking  fund.  But  the  remorselessly  growing  costs  of 
the  war  quickl}^  wiped  out  these  economies  and  consti- 
tuted a  demand  for  ever  greater  sums.  By  the  end  of 
the  fiscal  year  1916-17  tire  daily  expenditures  were  over 
$35,000,000.  The  high  point  was  reached  in  the  last 
quarter  of  the  calendar  year  1917,  wlien  they  averaged 
$38,100,000  daily.  Although  the  expenditures  for  the 
fiscal  year  1917-18  ran  somewhat  higher  than  those  of 
the  previous  year,  they  did  not  exceed  these  as  much  as 
the  rise  in  the  general  price  level  which  occurred  in 
the  interval  would  apparently  have  justified.  At  this 
rate  the  war  was  costing  Great  Britain  $1,455,000  an 
hour,  or  nearly  $25,000  a  minute. 

Such  large  expenditures  could  not  be  made  without 
a  certain  amount  of  waste  and  extravagance,  and  sharp 
criticism  was  made  in  many  of  the  British  journals  that 
a  considerable  part  of  them  was  extravagant,  if  not 
needless.  The  Spectator  characterized  the  expenditure 
of  the  Government  as  ^'lavish";  the  Nation  called 
attention  to  the  ''  profligacy  of  the  Government's  war 
finance  ";  the  Economist  affirmed  that  ''  the  nation's 
effort  is  seriously  weakened  by  the  waste  and  muddling 
of  which  new  examples  appear  week  by  week  ";  and, 
finally,  Herbert  Samuels,  Chairman  of  the  Committee 
on  Public  Expenditure,  in  a  debate  in  the  House  of 
Commons  on  June  19,  1918,  stated  that  the  matter  was 
approaching  a  "  public  scandal."  Although  allowance 
may  be  made  for  a  certain  extravagance  of  language  in 

92 


WAR  EXPENDITURES 

these  criticisms,  the  diversity  of  authorities  quoted  sug- 
gests that  there  was  some  basis  of  fact ;  indeed,  a  certain 
amount  of  waste  and  extravagance  would  seem  to  have 
been  inevitable  in  view  of  the  enormous  sums  involved 
and  the  haste  and  urgency  with  which  they  were  raised 
and  expended.  On  the  whole,  there  was  probably  less 
real  occasion  for  complaint  in  England  than  in  most 
of  the  other  belligerent  countries. 

There  occurred  in  France  the  same  suspension  of 
constitutional  methods  of  procedure  in  voting  and  con- 
trolling expenditures  as  had  taken  place  in  England. 
Votes  of  credit  were  granted  by  the  Assembly  practically 
in  the  amounts  asked  for  by  the  Government,  but  no 
accounting  was  made  in  detail  as  to  the  purposes  for 
which  these  sums  were  expended.  Indeed,  it  may  be 
said  that  one  of  the  effects  of  the  war  was  an  almost 
complete  disregard  of  regular  budgetary  procedure. 
M.  Ribot  in  a  speech  in  the  Chamber  of  Deputies  in 
1916  called  attention  to  the  fact  that,  owing  to  the 
system  of  asking  for  votes  of  credit  at  periodic  intervals, 
quarterly  budgets  had  practically  superseded  the  annual 
budget.  A  year  later  he  again  referred  to  this  point  and 
promised  that  this  would  be  the  last  occasion  on  which 
provisional  credits  would  be  asked,  at  least  for  civil 
expenditures;  thereafter,  he  said,  the  Government  in- 
tended to  introduce  an  annual  budget  which  would 
include  all  civil  expenditures  and  all  payments  in  con- 
nection with  the  public  debt,  so  that  only  purely  military 
expenditures  would  be  covered  by  the  quarterly  credits. 
This  pledge  was  carried  out  by  the  passage  of  the  civil 
budget  of  June  27,  1918,  which  was  the  first  budget 
passed  as  a  whole  since  the  beginning  of  the  war. 

The    disregard    of   constitutional    provisions    in    the 

93 


WAE  COSTS  AND  THEIR  FINANCING 

voting  of  piil)lic  money  in  France  finds  additional  illus- 
tration in  a  statement  presented  to  the  Chamber  of 
Deputies  by  the  Chief  Public  Accountant.''  This  showed 
tliat  the  credits  voted  for  the  13  months  ending  January 
31,  1917,  amounted  to  $6,473,400,000;  of  this  amount 
the  authorized  expenditure  amounted  to  $5,122,200,000, 
and  the  unauthorized  to  $1,351,200,000.  The  large  pro- 
portion of  unauthorized  expenditure  indicates  the  effect 
of  war  in  breaking  down  constitutional  safeguards  and 
the  extent  to  which  the  Executive  exercises  its  powers 
in  war  time  in  derogation  of  legislative  control.  The 
credits  voted  from  August  1,  1914,  to  December  31, 
1918,  are  shown  in  the  following  table: 


Credits  Voted  is  France,  1914-1918 

Au<?.  1  to  Dec.  .31,  1914 .$1,779,717,000 

Calendar  year   1915   4,560,89.5,000 

Calendar  year  1916   6,589.029.000 

Calendar  Vear  1917    8,374,185,000 

Calendar  year  1918   9,217,961.256 

$.30,521,787,256 


The  expenditures  of  France  show  the  same  progres- 
sive increase  as  characterized  those  of  the  other  belliger- 
ents. The  average  daily  outlay  remained  fairly  steady 
throughout  1914  and  1915  at  about  $12,300,000;  for 
1916  the  figure  increased  66  per  cent,  to  a  daily  average 
of  .$18,275,000;  in  1917,  an  increase  of  78  per  cent, 
brought  the  daily  average  to  $23,290,000;  and  in 
1918,  up  to  November,  the  daily  average  was  about 
$28,400,000.  The  monthly  and  daily  expenditures, 
averaged  on  the  votes  of  credit  for  each  year,  were 
as  follows: 

°  Economist,  March  24,  1917,  p.  553. 

04 


WAR  EXPENDITURES 


Monthly  and  Daily  War  Expenditures  of  France,  1914-1918 


Year 

Monthly 

DaUy 

Aug.-Dec,  1914      

$355,953,400 
380,074,775 
548,267,498 
697,850,000 
768,146,771 

$11,865,000 

1915 

12,609,159 

1916 

18,275,583 

1917 

23,290,000 

1918 

28,407,339 

These  expenditures  in  France  do  not  include  the 
advances  made  by  her  to  her  allies,  which  were  regarded 
more  as  investment  than  as  expenditure,  and  which 
amounted  to  $1,5'47,200,000  during  the  period  of  the 
war.  On  the  other  hand,  they  include  the  civil  expendi- 
tures, which  may  be  estimated,  on  the  basis  of  those 
for  1913,  at  about  $5,000,000,000.  If  these  be  subtracted, 
the  military  costs  are  found  to  have  been  almost 
$26,000,000,000. 

An  interesting  analysis  of  the  expenditures  for  the 
first  three  and  one-half  years  made  by  the  Budget  Com- 
mittee of  the  Chamber  is  as  significant  for  what  it  fails 
to  disclose  as  for  what  it  reveals.  According  to  this 
report,  the  expenses  of  the  war  from  its  inception  on 
August  1,  1914,  to  December  31,  1917,  totalled  $21,305,- 
000,000  of  which  sum  $17,309,000,000  was  used  for  mili- 
tary and  other  purposes  directly  connected  with  the 
prosecution  of  the  war.  Of  this  latter  sum,  some 
$15,200,000,000  was  used  for  purely  military  purposes, 
that  is,  for  waging  the  war  against  the  Central  Powers ; 
the  remaining  $2,000,000,000  was  used  for  repairing  the 
damage  inflicted  by  the  enemy,  and  to  that  extent  it  may 
be  said  to  have  anticipated  some  of  the  work  of  recon- 
struction  and   to   have   lessened   the   expenditures    for 

95 


WAR  COSTS  AND  THEIR  FINANCING 

reliabilitation   which   will  have   to  be   faced   after  the 
war.    The  detailed  table  is  as  follows  :^ 


Classification  of  War  Expenditures  in  France  to  December 

31,  1917 

Military $15,200,000,000 

Assistance  to  families  of  mobilized  men 1,546.000,000 

Aid  to  orphans  6,000,000 

Assistance  to  invaded  dejjartments   2,000,000 

Urgent  relief  25,600.000 

Assistance   to  refugees    183,800.000 

Rehabilitation  of  invaded  regions    93,507,000 

Reconstruction    of    landed    prop- 
erty       $53,480,000 

Reconstruction       of       industrial 

property 20,015,000 

Reconstruction     of     agricultural 

property 20,012.000 

Repair  of  harbors   and   construction   of  means   of 

communication 65,877,000 

Cultivation  of  abandoned  areas 6,000,000 

Credits    opened    for    reparation    for   damages   in- 
curred through  the  war   180,000.000 


Total $17,308,784,000 

Extraordinary  expenses  of  civil  service 134,576.345 

Total  war  expense   $17,443,360,345 

Public  debt  service 2.139,066.229 

Ordinary  expenses  of  civil  service   1,720.255.642 

$21,303,582,216 

The  increased  expenditure  for  the  year  1914  was  due 
almost  entirely  to  mobilization  and  military  operations. 
The  burden  of  the  war  in  the  form  of  increased  debt 
charges,  expenditure  for  relief  of  soldiers'  families  or  of 
refugees  from  the  devastated  areas,  and  other  increases 
indirectly  attributable  to  war  were  first  reflected  in  the 
expenditures  for  1015.  During  the  rest  of  the  war  every 
item  of  expenditure  in  this  classification  showed  a 
steady  and  progressive  increase.     Such  a  classification 

''Federal  Reserve  Bitlletin,  April,  1918,  p.  275. 

96 


WAR  EXPENDITURES 

is  of  interest  in  showing  that  the  burden  of  war  is  spread 
in  a  multitude  of  charges  over  the  whole  body  politic 
and  body  social,  and  is  by  no  means  confined  to  the 
strictly  military  outlays. 

There  were  three  budgets  in  Russia,  the  civil,  or 
ordinary,  the  extraordinary  civil,  and  the  extraordinary 
military.  The  first  two  of  these  seem  to  have  been 
continued  throughout  the  war  and  to  have  been  voted 
regularly.  The  third  budget  was  apparently  withdrawn 
from  legislative  control,  as  details  were  never  published 
with  regard  to  military  expenditures,  nor  was  authoriza- 
tion asked  for  votes  of  credit.  The  ordinary  expendi- 
ture did  not  show  any  considerable  increase  until  the 
year  1917,  when  the  expenditure  for  any  one  of  the 
previous  three  years  was  just  about  doubled.  Slight 
deficits  had  been  shown  every  year,  but  not  until  1917 
did  these  assume  unmanageable  proportions.  As  these 
deficits  are  attributable  to  the  war,  they  may  fairly  be 
counted  as  war  expenditures.  The  expenditures  and 
deficits  on  the  civil  budget  are  shown  in  the  following 
table : 

Civil  Expenditures  in  Hussia,  1914-1917 


Year 

Expenditures 

Deficit 

1914 

$1,464,000,000 
1,534,000,000 
1,587,000,000 
3,061,000,000 

$15,000,000 

1915 

137,000,000 

1916 

130,000,000 

1917 

1,191,000,000 

The  war  expenditures   of   Russia   understate   rather 
than  exaggerate  the  military  contribution  made  by  that 

97 


WAR  COSTS  AND  THEIR  FINANCING 

country.  This,  was  due  to  several  factors,  namely,  the 
very  low  pay  received  by  the  soldiers,  the  fact  that 
the  huge  expense  of  transporting  troops,  equipment,  and 
materials  over  the  Government-owned  railways  was  left 
to  post-war  adjustment,  and  the  low  cost  of  food, 
although  this  was  in  part  offset  by  the  higher  cost  of 
munitions.  The  war  expenditures  to  the  end  of  1917 
are  given  as  follows  in  a  review  of  Russian  war  finance 
ogfirations  published  in  the  official  Viestnik  Finansov:^ 

War  Expe]\t)ittjbes  of  Russia,  1914-1917 
Aug.  1  to  Dec.  31,  1914   $1,273,000,000 

1915   4,687.450.000 

1916   7,633,500,000 

1917,  to  Sept.  1    7,102,407,500 

$20,696,357,500 

Although  Italy  delaj'ed  her  entrance  into  the  war 
until  May  24,  1915,  the  beginning  of  her  expenditures 
on  war  account  may  be  said  to  have  been  practically 
coincident  with  that  of  the  other  belligerents,  for  the 
costs  of  armament  and  mobilization  preparatory  to  par- 
ticipation were  heavy.  The  war  expenditures  from 
August  1,  1914,  to  October  31,  1918,  were  as  follows  :^ 

War  Expenditures  of  Italy,  1914-1918 

Alio-.  1,  1914-.Tune  30,  1915 .'?6'07,840,000 

July  1,   1915-June  30,   1916 1.670,300.000 

July  1,  1916-June  30,  1917 2,826,440,000 

July  1,  1917-June  30,  1918 3,946.920,000 

July  1,  1918-Nov.  1,   1918 1.345,120.000 

Interest  on  debt  and  outstanding  liabilities 2,127.200,000 

$12,523,820,000 

The  expenditures  of  Germany  have  not  been  published 
and  therefore  must  be  estimated  from  the  votes  of  credit 

'  Quoted  in  Federal  Reserve  Bulletin,  April,  1918,  p.  276. 
^Economist,  February  1,  1919,  p.  136. 

98 


WAR  EXPENDITURES 

and  the  popular  loauSo  Because  of  the  secrecy  maui- 
tained  by  the  German  Government  regarding  its  finan- 
cial operations  and  the  difficulty  of  securing  the  few 
facts  that  are  published,  these  are  practically  the  only 
data  upon  which  an  estimate  may  be  based. 

An  attempt  was  made  during  the  first  year  of  the 
war  to  effect  a  balance  between  expenditures  and 
receipts  by  transferring  the  whole  of  the  military 
and  naval  outlay,  amounting  in  the  fiscal  year  1913  to 
$344,425,000,  from  the  ordinary  civil  budget  to  the 
extraordinary  war  budget.  In  this  way  not  only  was  a 
deficit  prevented,  but  Karl  Helfferich,  the  Minister  of 
Finance,  was  able  to  announce  a  surplus  for  the  year  of 
$54,750,000.  The  following  March,  however,  in  present- 
ing the  budget  for  the  fiscal  year  1916-17,  Dr.  Helfferich 
stated  that  owing  to  the  great  increase  in  the  service 
of  the  Imperial  debt,  which  was  estimated  at  $575,750,- 
000,  as  against  $317,000,000  in  1915,  and  $62,500,000 
in  the  last  peace  budget,  even  this  formal  balance  could 
not  be  maintained.  There  was  an  increase  in  the  ordi- 
nary budget  of  over  $84,000,000  in  expenditure  as 
compared  with  1915,  and  as  the  receipts  had  fallen  off 
over  $36,000,000,  a  deficit  of  $120,000,000  resulted.  By 
the  end  of  the  fiscal  year  the  debt  charges  had  risen  to 
$891,500,000,  and  in  his  budget  speech  of  February, 
1917,  the  Finance  Minister  reported  a  formal  deficit  in 
the  ordinary  budget  of  $312,500,000  for  the  year  ending 
March  31,  1918.  This  was  based  upon  an  estimated 
nominal  expenditure  of  $1,337,500,000. 

The  expenditures  of  the  Imperial  Government  for  the 
war  are  probably  best  estimated  by  taking  the  total 
credits  granted  by  the  Reichstag.  As  it  was  constitu- 
tionally necessary  to  have  the  money  even  for  military 
expenditures  first  appropriated  by  that  body,  these  vote^ 

99 


WAR  COSTS  AND  THEIR  FINANCING 

are  matters  of  public  record  aud  the  figures  may  be 
accepted  as  accurate.  No  details,  however,  have  been 
made  public  as  to  how  these  sums  were  distributed 
among  the  different  services.  From  the  beginning  of 
the  war  to  the  signing  of  the  armistice,  the  Reichstag 
granted  12  votes  of  credit  as  follows : 

Votes  of  Credit  in  Germany,  1014-1918 

August,    1914   $1,250,000,000 

December,    1914    1,250,000.000 

March,    1915    2,500,000,000 

August,   1915   2.500,000.000 

December,    1915     2,500.000,000 

June,    1916   3,000.000.000 

October,   1916   3.000.000,000 

February,    1917    3.750,000.000 

July,    1917    3,750.000,000 

December,   1917   3.750,000,000 

March,   1918   3.750,000,000 

July,   1918    3,750.000.000 

$34,750,000,000 

The  actual  expenditures,  however,  far  exceeded  the 
credits  which  had  been  granted.  This  significant  fact 
was  announced  by  Dr.  Schiffer,  IMinister  of  Finance,  in 
a  speech  to  the  German  National  Assembly  at  "Weimar 
on  February  15,  1919. ^''.  According  to  his  statement 
the  expenditures  of  the  war  were  as  follows: 

War  Expendittjees  of  Germany,  1914-1918 

1914  $1,875,000,000 

1915  5,750.000,000 

1916  6.650.000.000 

1917  9.875.000,000 

1918  12,125.000.000 

$36,275,000,000 

Treasury   bills   1 .500.000.000 

Credits  to  Allies   2,375.000.000 


Total    $40.150,000,000 

"  Tossisiche-Zeitung,  February  16,  1919. 

100 


WAR  EXPENDITURES 

The  existence  of  these  large  unauthorized  liabilities 
shows  that  in  Germany,  as  in  most  of  the  other  Euro- 
pean belligerent  countries,  the  necessities  of  the  war  led 
the  Executive  to  override  the  constitutional  provisions 
regarding  the  voting  of  credits  and  to  disregard  the 
requirements  for  legislative  control.  It  is  significant, 
however,  that  the  sums  thus  involved  were  far  larger 
in  Germany  than  in  any  other  country.  The  daily 
expenditures,  according  to  the  table  just  given,  ranged 
from  $12,250,000  in  1914  to  $33,750,000  in  1918.  These 
sums,  however,  did  not  include  the  unauthorized  ex- 
penditures which  it  is  not  possible  to  distribute  by 
fiscal  years.  In  a  later  memorandum  presented  to  the 
National  Assembly,"  Dr.  Schiffer  estimated  that  the  total 
war  expenditure  of  Germany  amounted  to  $42,500,000,- 
000.  A  still  later  announcement  made  the  startling 
disclosure  that  Germany's  floating  debt  amounted  to 
$18,000,000,000.  This  statement  shows  that  the  actual 
expenditures  made  during  the  war  were  far  in  excess 
of  the  officially  admitted  outlays  and  throws  an  interest- 
ing light  upon  German  financial  methods. 

In  addition  to  this  direct  money  outlay  the  war 
damages  inflicted  on  German  property  were  estimated 
at  $1,124,000,000  and  the  claims  of  ship  owners  at 
$375,000,000,  and  $1,240,000,000  were  stated  to  have 
been  spent  for  the  relief  of  families  of  dead  soldiers 
hy  the  states  and  municipalities.  This  latter  expendi- 
ture had  been  defrayed  during  the  course  of  the  war 
by  the  local  governments,  but  on  the  understanding 
that  it  would  be  assumed  by  the  Imperial  Government 
upon  its  conclusion. 

Huge  as  is  the  sum  stated  above,  it  by  no  means 

^  Copenhagen  despatch,  March  26,  1919,  in  WasMngfon  Post, 
March  27,  1919. 

101 


WAR  COSTS  AND  THEIR  FINANCING 

measures  completely  the  real  expenditures  made  on  tlie 
war  by  Germany.  In  the  case  of  the  other  nations  the 
money  outlay  may  be  accepted  as  a  correct  statement 
of  costs.  Not  so  in  the  case  of  Germany.  For  years  she 
had  been  preparing  for  this  conflict  and  had  collected 
immense  stores  of  materials,  munitions,  and  supplies 
of  every  kind.  Part  of  the  real  cost,  therefore,  is  repre- 
sented by  outlays  made  in  previous  years,  though  it  is 
impossible  to  state  how  much  should  be  credited  to 
these  earlier  expenditures.  During  the  war,  moreover, 
Germany  exacted  tribute  from  occupied  territory.  This 
was  estimated  in  October,  1917,  at  $1,600,000,000  in  the 
case  of  Belgium  alone.  The  exploitation  of  the  resources 
of  the  people  of  Belgium,  Northern  France,  Poland, 
Rumania,  and  parts  of  Russia  must  also  be  counted  in 
any  comparison,  as  such  items  in  other  countries  were 
paid  for.  The  total  value  of  supplies  and  materials  and 
services  used  by  Germany  in  prosecuting  the  war  must 
therefore  be  reckoned  at  a  figure  considerably  larger 
than  the  total  votes  of  credit,  huge  as  these  were. 

In  none  of  the  other  major  belligerent  countries 
was  there  greater  secrecy  concerning  financial  op- 
erations maintained  than  in  Austria-Hungary.  The 
figures  for  the  civil  budget,  as  to  both  expen- 
ditures and  revenue,  were  published,  but  infor- 
mation regarding  military  expenditures  was  jeal- 
ously guarded.  The  report  of  the  State  Debt  Control 
Commission  which  was  published  in  November,  1915, 
showed  the  war  expenditures  to  the  end  of  1914. 
For  the  first  five  months  of  the  war  the  war  costs  to 
Austria  were  about  $1,125,000,000,  or  about  $225,000,000 
a  month.  Hungary  paid  during  the  same  period  the 
sum  of  $375,000,000,   or   about   $75,000,000   a   month. 

102 


WAR  EXPENDITURES 

After  that  date  all  is  conjecture.  There  was  a  complete 
breakdown  of  ordinary  budgetary  procedure  and  no 
budget  was  presented  during  three  years.  It  was  not 
until  July,  1917,  that  the  lower  house  of  the  Austrian 
Parliament  was  able  to  secure  the  observance  by  the 
Government  of  the  constitutional  provisions  concerning 
the  passage  of  the  budget.  Then  the  Chamber  of 
Deputies  in  passing  the  provisional  budget  asked  for  by 
the  Government  insisted  on  fixing  a  maximum  limit  of 
$1,200,000,000  instead  of  leaving  the  amount  indefinite. 
Up  to  that  time  the  money  had  been  raised  and  expended 
by  Executive  act  alone.  The  Chamber  insisted  that 
future  estimates  must  show  the  war  expenditures 
separately  from  the  civil  budget  and  that  a  real  effort 
must  be  made  to  cover  the  latter  by  means  of  taxes  and 
other  revenues.  The  expenditures  of  Austria-Hungary, 
both  for  the  civil  and  military  budgets,  so  far  as  they 
have  been  published,  are  given  in  the  following  table: 


Expenditures  of  Austria-Hungary,  1914-1918 


Fiscal 
year 
ending 
June  30 


EXPENDITURES 


Civil 


Military 


Total 


1915... 
1916... 
1917... 
1918. .. 
1919. .  . 

Total. 


*t$692,200,000 

*t65 1,600, 000 

§800,000,000 

§1,000,000,000 

*1, 302, 000, 000 


*t$2, 164,000,000 

*t2, 993, 000, 000 

§3,200,000,000 

§3,400,000,000 

*3, 564, 400, 000 


$2,856,200,000 
3,644,600,000 
§4,000,000,000 
*4, 433, 900, 000 
*4, 866, 400, 000 


•54,445,800,000      $15,321,400,000 


$19,767,200,000 


*  Budget  estimates. 

t  Estimates  of  Copenhagen  Society  for  Study  of  the  War. 

§  Writer's  estimates. 

.103 


WAR  COSTS  AND  THEIR  FINANCING 

There  seems  to  be  no  doubt  that  the  official  figures 
of  expenditures  are  in  all  cases  too  low,  both  for  the 
military  budget  and  for  the  civil  budget,  which  includes 
the  interest  on  the  public  debt.^-  The  Government  seems 
to  have  published  wilfully  false  statements  as  to  the 
financial  situation  in  order  not  to  alarm  the  people 
unduly;  consequently,  all  of  the  figures  concerning 
expenditures  must  be  taken  with  considerable  reserve. 
But  although  these  figures  may  not  be  accurate  in  them- 
selves, they  serve  to  give  a  fairly  correct  picture  of  the 
progressive  course  of  expenditures  during  the  war.  As 
every  effort  was  made  by  the  Government  to  conceal  the 
real  facts,  the  admitted  increase  shown  in  these  figures 
is  all  the  more  impressive. 

It  has  not  been  possible  to  secure  the  expenditures  of 
Austria  and  of  Hungary  separately  for  the  period  of 
the  war.  During  the  year  1918  the  Austrian  and 
Hungarian  Parliaments  were  unable  to  agree  upon  the 
distribution  of  their  common  expenditures,  and  accord- 
ingly this  was  fixed  by  Imperial  rescript  at  63.6  per 
cent,  for  Austria,  and  36.4  per  cent,  for  Hungary.  If 
this  proportion  be  applied  to  the  total  joint  expendi- 
tures in  the  table  just  given,  it  would  appear  that  the 
expenditures  of  Austria  amounted  to  $12,571,939,000, 
and  those  of  Hungary  to  $7,195,300,000. 

It  is  now  possible  to  bring  together  the  figures  for  all 
the  belligerent  countries  and  to  estimate  the  total 
expenditures  for  the  war  during  the  four  and  one-half 
years  from  August  1,  1914,  to  such  dates  after  the  sign- 
ing of  the  Armistice  as  the  different  belligerents  closed 
their  fiscal  years. 

"The  expenditures  of  the  Empire  covered  only  the  three  items 
of  war,  finance,  and  foroisn  affairs.  Austria  and  Hungary  each, 
had  its  ovvn  budget  in  addition  to  the  Imperial  budget. 

104. 


WAR  EXPENDITURES 


Gross  Money  War  Expenditures  of  Belligerents 

United  States    $32,080,265,968 

Great  Britain    44,029,011.868 

Canada 1,605,570,032 

Australia 1,423,208,040 

New  Zeal  nd   378,750,000 

South  African  Union    300.000,000 

India 601,279.000 

Crown  colonies  and  dependencies 125,000,000 

France "25.812,782.800 

Russia  in  Europe 22,593,950,000 

Italy 12,313,998.000 

Belgium 1,154,467,914 

Serbia 399,400,000 

Rumania 1,600.000,000 

Greece 270.000,000 

Japan 40,000,000 

Other  Entente  Allie 500,000,000 

Total $145,287,690,622 

Germany $40,150,000,000 

Austria-Hungary 20,622.960,600 

Turkey ^ 1.430,000.000 

Bulgaria 815.200,000 

Total $63,018,160,600 

Grand  total    $208,305,851,222 

It  should  be  noted  that  these  are  the  gross  expendi- 
tures and  include  the  loans  made  to  their  allies  by  the 
United  States,  Great  Britain,  France,  and  Germany, 
amounting  in  all  to  about  $22,072,214,125.  If  this  sum 
be  subtracted  to  avoid  duplication,  the  net  expenditures 
are  found  to  be,  in  round  numbers,  $186,000,000,000. 

The  figures  given  in  this  table  are  so  stupendous  that 

^'  This  is  the  calculation  of  the  writer,  based  upon  the  declared 
yearly  expenditures.  In  February,  1919,  the  Chamber  of  Depu- 
ties estimated  the  costs  of  the  war  to  France  at  $36,400,000,000, 
but  these  seem  to  have  been  the  total  gross  expenditures  during 
the  war  and  not  those  attributable  solely  to  the  Avar  itself.  If 
this  estimate  were  accepted  the  gross  cost  of  the  war  would  be 
raised  to  approximately  219,000,000,000  dollars  and  the  net  cost 
to  197,000,000,000  dollars. 

105 


WAR  COSTS  AND  THEIR  FINANCING 

they  fail  to  carry  a  definite  impression.  If  the  annual 
national  incomes  of  the  more  important  nations  be  com- 
pared with  their  expenditures  for  the  last  year  of  war- 
fare, the  real  burden  is  made  more  comprehensible.  In 
some  cases  the  war  was  already  costing  more  in  a  single 
year  than  the  estimated  pre-war  income  of  the  whole  peo- 
ple, and  in  all  the  others  except  the  United  States  it  was 
approaching  very  close  to  this  point.  Only  in  the 
United  States  did  there  remain  any  appreciable  resources 
which  might  yet  be  drawn  upon  to  defray  the  costs  of 
the  economic  reconstruction  of  the  belligerent  world. 
The  following  table  gives  these  figures: 


National  Incomes  and  War  Expenditures  of  the  PRiNciPAii 
Belligerents,  1918 


Annual  national 
pre-war  income 


War  expendi- 
ture, 1918 


United  States. . .  . 
Great  Britain. .  . . 

France 

Russia 

Italy 

Germany 

Austria-Hungary . 


$38,000,000,000 
10,700,000,000 
7,300,000,000 
6,500,000,000 
3,000,000,000 
10,500,000,000 
5,500,000,000 


$18,000,000,000 
13,896,505,940 
10,671,000,000 
*9, 000, 000, 000 

3,946,920,000 
12,125,000,000 

3,560,000,000 


*  1917. 

In  conclusion  it  should  be  noted  that  the  costs  thus 
far  tabulated  are  only  the  direct  money  outlays  of  the 
countries  involved.  They  do  not  take  into  account  the 
indirect  costs,  such  as  destruction  of  property,  depreci- 
ation of  capital,  loss  of  production,  depletion  of  pro- 
ducers, interruption  to  trade,  and  similar  economic 
losses.^* 

"  For  an  estimate  of  the  indirect  costs  see  the  author's  "  Direct 
and  Indirect  Costs  of  the  Great  World  War"  (Washington: 
Carnegie  Endowment  for  International  Peace,  1919). 

106 


CHAPTEE  V 

PAPER  MONEY  AND  BANK  CREDIT 

Large  use  of  banks  in  financing  the  war  —  Direct  issues  of  paper 
money  in  Europe  —  Services  of  the  Federal  Reserve  System 
in  the  United  States  —  Treatment  of  gold. 

One  of  the  outstanding  features  of  the  World  War 
Avas  the  large  extent  to  which  belligerent  Governments 
availed  themselves  of  the  assistance  of  the  banks,  directly 
and  indirectly.  Almost  without  exception  the  Govern- 
ment of  each  country  involved  turned  to  its  great  cen- 
tral banking  institution  for  immediate  advances  with 
which  to  meet  the  costs  of  mobilization  and  the  first 
military  operations.  Although  these  advances  were 
generally  paid  back,  in  part  at  least,  after  the  issue 
of  the  first  war  loans,  the  Governments  continued  to  ask 
further  advances  from  the  banks,  and  the  end  of  the 
war  found  practically  every  Government  in  debt  to  its 
banks  for  very  large  amounts. 

The  problem  presented  to  the  banks  was  two-fold :  In 
the  first  place  they  must  provide  the  industrial  and 
commercial  world  with  needed  accommodations,  and  in 
the  second  place  they  must  give  to  the  Governments  all 
assistance  possible  for  the  vigorous  prosecution  of  the 
war.  In  general,  it  must  be  said  that  the  banks  were 
well  prepared  for  their  tremendous  task  and  that  they 
acquitted  themselves  nobly.  Methods  differed  somewhat 
in  the  different  countries,  but  on  the  whole  there  is  a 
striking  similarity  in  the  use  made  of  the  banks  and  in 
the  way  in  which  they  responded  te  private  and  Govern- 
ment demands. 

107 


WAR  COSTS  AND  THEIR  FINANCING 

In  Great  Britain  the  extension  of  the  bank  holiday 
and  the  moratorium  postponed  the  necessity  for  immedi- 
ate action  on  the  part  of  the  banlvs  in  granting  the 
credit  necessary  to  meet  the  obligations  of  their  cus- 
tomers that  were  falling  due.  There  was,  however,  an 
enormous  mass  of  unliquid  bills  and  acceptances  which 
had  to  be  taken  care  of,  and  the  great  problem  confront- 
ing the  banks,  so  far  as  concerned  their  responsibility 
to  the  industrial  and  commercial  world,  was  to  render 
these  securities  available  as  means  of  payment.  Little 
was  done  until  August  12,  when  the  Government 
announced  that  the  Bank  of  England,  under  Govern- 
ment guarantee  against  loss,  would  discount  at  the 
existing  bank  rate  without  recourse  to  the  holder  all 
approved  bills  accepted  before  August  4.  By  this 
operation  the  "  frozen  "  bills  were  released  and  great 
assistance  was  given  to  British  credit  abroad.  There 
was  little  new  business,  as  the  closing  of  the  Stock 
Exchange,  the  interruption  of  ordinary  business,  and 
general  unwillingness  to  engage  in  new  enterprises  sus- 
pended applications  for  additional  credit.  The  move- 
ment of  goods  having  been  greatly  reduced,  there  were 
few  new  bills  of  exchange  presented  for  discount.  This 
abnormal  condition,  however,  did  not  continue  long, 
as  the  energies  of  the  nation  were  soon  diverted  to  the 
production  of  munitions  of  war.  Purchases  of  food- 
stuffs and  other  supplies  from  the  United  States  and 
other  countries  brought  foreign  trade  up  to  the  pre-war 
level,  so  that  it  was  not  long  before  the  discounts  at  tlie 
banks  exceeded  the  amount  granted  before  the  outbreak 
of  the  war. 

As  Great  Britain  depended  so  largely  upon  foreign 
sources  of  supply  for  food  and  for  many  of  the 
materials  of  war,  it  was  essential  that  foreign  exchange 

108 


PAPER  MONEY  AND  BANK  CREDIT 

be  stabilized  and  that  the  goods  be  secured  with  as 
small  an  export  of  gold  as  was  possible.  Imports  were 
increasing  to  enormous  proportions,  but  exports  were 
necessarily  reduced  as  the  productive  energies  of  the 
nation  were  directed  more  and  more  into  war  channels ; 
hence  the  ordinary  balancing  of  exports  against  imports 
could  no  longer  be  depended  upon  to  maintain  the  rates 
of  foreign  exchange  at  par.  Securities  were  used  in 
part  payment  for  the  purchases  abroad;  soon  after  the 
exchanges  were  opened  in  November,  1914,  the  sale  of 
American  securities  owned  in  England  began,  but  this 
was  not  in  itself  sufficient  to  meet  the  steadily  growing 
international  balance  against  England  and  to  maintain 
the  normal  rates  of  sterling  exchange.  The  Government 
endeavored  to  meet  the  situation  by  restricting  the 
importation  of  unnecessary  goods  and  at  the  same  time 
encouraging  the  exportation  of  British  manufactures. 
But  after  all  these  expedients  had  been  exhausted,  there 
was  still  a  balance  against  England  which  would  have 
occasioned  the  exhaustion  of  the  Bank  of  England's 
reserve  had  shipments  of  gold  been  permitted  to  follow 
their  ordinary  course.  Owing  to  large  purchases  of 
supplies  and  munitions  the  rate  of  exchange  began  early 
in  1915  to  run  against  Great  Britain.  The  Bank's 
gold  reserve  was  used,  by  redemption  of  its  obligations, 
to  pay  exchange  from  $4,813  in  March  down  to 
$4.7625  in  July,  but  it  was  evident  that  a  more  far- 
reaching  remedy  would  have  to  be  taken  to  stop  the 
decline.  This  was  found  in  the  floating  of  the  Anglo- 
French  Loan  in  the  United  States  in  October,  1915,  by 
which  time  sterling  exchange  had  fallen  to  the  unpre- 
cedented point  of  $4.49.1 

In  still  another  way  the  Bnnk  of  England  lent  its 
» Chapter  III.  ' 

109 


WAR  COSTS  AND  THEIR  FINANCING 

assistance  in  financing  the  war.  This  was  through  the 
direct  loan  of  its  credit  to  the  Government  by  the  pur- 
chase of  short-term  Treasury  bills.  In  the  first  days 
after  the  outbreak  of  the  war,  when  commerce  and 
industry  were  disorganized,  tlie  banks  im^ested  largely 
in  Treasury  bills  at  rates  of  interest  as  low  as  3%  per 
cent.  Later,  however,  as  industry  became  adjusted  to 
war  conditions  and  the  demands  of  business  men  on  the 
banks  for  loans  became  greater,  the  Government  was 
forced  to  pay  higher  rates  of  interest  on  its  Treasury 
bills,  which  were  issued  in  large  amounts.  When  the 
mass  of  bills  on  the  market  became  unwieldy,  the 
Government  funded  them  into  long  term  debts.  In  all 
these  transactions  the  assistance  of  the  Bank  of  England 
was  of  the  greatest  value  to  the  Government.  The 
burdens  laid  upon  the  institution  were  great,  but  it 
came  through  the  ordeal  of  the  war  with  heightened 
reputation.  Although  the  British  credit  system  has  been 
severely  criticized,  and  by  none  more  than  by  English 
writers  themseh^s,  it  has  emerged  from  the  most  severe 
stress  ever  imposed  upon  it,  not  merely  unscathed,  but 
with  its  roots  sunk  deeper  into  the  fabric  of  British 
business  and  with  the  increased  confidence  of  the  British 
people. 

Perhaps  on  no  other  single  bank  was  a  greater  burden 
of  responsibility  laid  than  upon  the  Bank  of  France. 
The  dislocation  of  industry  was  greater  in  France  than 
in  any  other  country  except  Belgium ;  at  the  same  time, 
owing  to  the  very  close  relations  between  the  Govern- 
ment and  the  Bank,  the  appeal  of  the  Government  for 
assistance  was  more  immediate  and  greater  than  in  most 
of  the  other  belligerent  countries.  The  demands  upon 
the  Bank  for  discoTvnts  by  private  business  began  before 

110 


PAPER  MONEY  AND  BANK  CREDIT 

the  actual  outbreak  of  hostilities.  lu  the  week  ending 
Saturday,  August  1,  1914,  the  amount  of  commercial 
paper  discounted  by  the  Bank  increased  to  $608,000,000 
from  $316,000,000  for  the  preceding  week.  So  great, 
indeed,  was  the  pressure  that  the  bank  rate  was  raised 
from  three  per  cent,  to  six  per  cent.  It  is  difficult  to 
follow  the  operations  of  the  Bank  of  France  after  this 
date  for  the  publication  of  its  weekly  statement  was 
discontinued  and  it  was  not  renewed  until  February  4, 
1915.  Subsequently,  however,  this  omission  was  partly 
corrected  by  the  publication  of  the  Bank's  condition  on 
October  1  and  15  and  December  10  and  24.  The  extent 
of  the  service  of  the  Bank  in  meeting  the  needs  of  the 
business  community  is  evidenced  by  the  expansion  of 
the  discounts  and  private  advances.  By  October  1  the 
discounts  amounted  to  $895,200,000,  which  was  the 
higliest  point  recorded  during  the  course  of  the  war. 
Although  this  figure  had  fallen  by  October  15  to 
$871,800,000,  the  private  advances  had  increased  to 
$168,200,000,  or  $19,400,000  more  than  they  were  on 
July  31.  Thereafter  there  Avas  a  steady  decline  in  the 
amount  of  discounts,  while  the  advances  on  securities 
fell  off  until  December,  1915,  after  which  they  fluctuated 
around  a  considerably  higher  level.  The  reason  for  the 
decline  in  the  amount  of  the  discounts  was  the  gradual 
liquidation  of  the  paper  affected  by  the  moratorium. 
As  this  was  reduced,  its  place  was  not  taken  by  an 
equivalent  amount  of  new  paper.  The  prostration  of 
business  was  too  great  for  normal  activities  to  furnish 
the  usual  amount  of  commercial  paper.  Probably  the 
service  of  the  Bank  to  the  public  is  adequately  measured 
by  the  amount  of  pre-moratorium  paper  it  carried.  This 
stood  at  $895,200,000  on  October  1,  1914,  but  thereafter 
it    steadily    declined.      By    October    7,    1915,    it    was 

111 


WAR  COSTS  AND  THEIR  FINANCING 

$391,100,000,  and  on  October  5,  1916,  it  had  been 
reduced  to  $276,600,000.  New  discounts  developed  very 
slowly.  On  December  10,  1914,  they  amounted  to  only 
$42,600,000,  and  a  year  later,  on  December  9,  1915, 
they  had  grown  only  to  $63,400,000.  It  is  clear  that  the 
accommodation  of  the  Bank  to  the  public  had  been 
greatly  lessened  as  a  result  of  the  war. 

The  Bank  did  not  curtail  its  loans ;  it  simply  changed 
their  character.  The  advances  to  the  State,  which  had 
stood  on  July  31,  1914,  at  $41,000,000,  increased  by 
leaps  and  bounds.  These  stood  on  October  15,  1914,  at 
$420,000,000 ;  on  April  15,  1915,  they  were  $1,000,000,- 
000 ;  by  May  31,  1917,  $2,100,000,000 ;  and  by  October  31, 
1918,  had  reached  the  high  mark  of  $3,430,000,000. 
It  is  needless  to  try  to  chronicle  the  successive  advances ; 
there  was  a  steady  increase  as  time  went  on,  with  occa- 
sional temporary  decreases  after  the  subscriptions  to  the 
national  loans  were  paid  in.  In  contrast  to  English  and 
American  experience,  the  advances  to  the  State  occa- 
sioned not  an  expansion  of  the  credit  deposits,  but  an 
enlargement  of  the  note  circulation.  These  issues,  which 
amounted  on  July  24,  1914,  to  $1,182,200,000,  jumped 
to  $1,859,800,000  on  October  1,  and  from  that  time  on 
continued  to  increase  in  a  menacing  manner.  It  is 
evident  from  what  has  been  said  that  the  increase  in 
notes  was  not  made  in  response  to  monetaiy  needs  of 
business,  but  rather  in  response  to  the  fiscal  needs  of 
the  Government.  Failure  to  distinguish  between  these 
two  needs  led  to  a  large  and  dangerous  inflation  of  the 
currency  in  France  with  consequent  depreciation  of  the 
money  unit  and  rise  in  prices.  The  suspension  of  specie 
payments  by  act  of  August  5,  1914,  and  the  grant  of 
legal-tender  quality  to  the  notes  gave  to  the  issues  of 
the  Bank  of  France  the  character  of  inconvertible  paper 

112 


PAPER  MONEY  AND  BANK  CREDIT 

money.  Great  as  were  the  services  of  the  Bank  of 
FrancTi  to  the  country,  the  very  magnitude  of  advances 
to  the  State  has  been  the  measure  of  the  inflation  of  the 
French  currency.  Although  a  certain  addition  to  the 
circulation  medium  was  called  for  in  the  first  days  of 
panic  and  readjustment  the  subsequent  inflation  cannot 
be  explained  on  the  ground  of  monetary  necessities. 

The  Bank  of  Russia  was  closely  affiliated  with  the 
Government  and  in  that  relation  served  principally  the 
needs  of  the  State.  A  legal  limit  was  placed  upon  its 
note  issues,  which  were  permitted  to  exceed  the  cash 
held  by  the  Bank  by  a  fixed  amount  of  $150,000,000. 
As  cash  there  was  counted  not  only  the  gold  and  silver 
in  the  vaults  of  the  Bank  itself,  but  also  the  deposits 
maintained  in  the  chief  financial  centers  of  Europe. 
The  fiduciary  issue  was  unimportant  until  the  outbreak 
of  the  war,  as  the  cash  generally  exceeded  the  note  circu- 
lation. The  last  return  before  the  war,  July  21,  1914, 
showed  that  the  Bank  held  $824,600,000  in  gold  and 
$30,910,000  in  silver  in  its  own  vaults  and  $71,975,000 
on  deposit  abroad,  a  total  of  $933,485,000  against  note 
issues  of  $841,600,000.  On  July  31,  1914,  the  legal  limit 
of  the  fiduciary  issue  was  raised  to  $750,000,000,  and 
after  the  outljreak  of  war  specie  payments  were 
suspended. 

The  Bank  of  Russia  began  almost  at  once  to  increase 
its  issue  of  notes,  both  for  the  accommodation  of  private 
borrowers  and  to  meet  the  demands  of  the  State.  By 
the  end  of  the  year  (December  29,  1914)  the  note  issues 
amounted  to  $1,474,900,000  and  the  Treasury  short-term 
bonds  in  the  portfolio  of  the  Bank  to  $255,700,000. 
From  that  time  on  there  was  a  steady  and  rapid  increase 
in  both  items  in  practically  similar  amounts.     Repre- 

113 


WAR  COSTS  AND  THEIR  FINANCING 

sented  by  lines  on  a  chart,  they  result  in  two  almost 
parallel  lines  running  steeply  athwart  the  page  in  an 
upward  direction."  In  other  words,  the  additional  bank 
notes  were  issued  almost  exclusively  for  the  purpose  of 
discounting  Treasury  bills,  and  were  used  by  the  Gov- 
ernment to  defray  its  own  expenditures.  The  additional 
issues,  therefore,  were  not  made  in  response  to  an 
increased  commercial  demand.  This  was  as  clear  a  case 
of  inflation  as  the  issue  of  inconvertible  paper  money 
directly  by  the  State  would  have  been.  By  August  29, 
1917,  when  the  Bank  ceased  to  discount  further  Treas- 
ury bills,  the  account  stood  as  follows : 

Gold  in  vault    .|668.400,000 

Notes   in   circulation    7.558.200.000 

Treasury  short  term  bonds  discounted 6,199,300,000 

The  last  published  report  by  the  Bank  of  Russia,  made 
as  of  October  29,  1917,  showed  gold  reserves  of  prac- 
tically the  same  amount,  $667,000,000,  Imt  with  note 
issues  swelled  to  $9,458,500,000,  an  increase  of  almost 
$2,000,000,000  in  two  months. 

The  annual  reports  of  the  Bank  of  Italy  and  of  the 
other  Italian  banks  of  issue,  those  of  Naples  and  of 
Sicily,  segregate  the  total  amount  of  notes  issued  to 
satisfy  commercial  needs  and  those  issued  on  account 
of  the  State.  The  following  table^  gives  the  total  classi- 
fied note  circulation  of  the  three  banks  of  issue  and  of 
the  Bank  of  Italy  separately  at  the  close  of  each  calendar 
year  during  the  war : 

*  See  chart  in  Federal  Reserve  Bulletin,  Decemher,  1917,  p.  944. 
'Compiled  from  tables  in  Federal  Reserve  Bulletin,  April,  1918, 
p.  278,  and  in  Economist,  February  1,  1919,  p.  136. 

114 


PAPER  MONEY  AND  BANK  CREDIT 


Bank  Note  Circulation  in  Italy 
{In  millions) 


Decem- 
ber 31 


For 
needs  of 
Com- 
merce 


For 
needs  of 
Govern- 
ment 


Total 


bank  of  ITALY 


For 

needs  of 
Com- 
merce 


For 
needs  of 
Gov- 
ern- 
ment 


Total 


1913 
1914 
1915 
1916 
1917 
1918 


$456.7 
440.2 
379.7 
499.6 
518.4 
916.9 


$147.0 

413.9 

510.8 

1,166.6 

1,433.2 


.7 

587. 2 

793.6 

1,010.4 

1,685.0 

2,350.1 


$328.7 
286.3 
409.2 
442.4 


$103.8 
321.8 
366.1 

865.4 


$432.4 

608.0 

775.3 

1,307.8 


It  is  evident  from  this  table,  condensed  as  it  is,  that 
the  expansion  of  their  fiduciary  circulation  by  the  Italian 
banks  of  issue  was  made  to  meet  the  needs  of  the  State 
rather  than  the  commercial  needs  of  private  borrowers. 
Indeed,  for  the  first  year  and  a  half  there  was  a  decline 
in  the  discounts  of  ordinary  commercial  paper,  which, 
however,  was  more  than  made  good  by  the  discount  of 
Treasury  bills.  Thereafter  both  showed  increases, 
though  this  was  much  greater  in  the  latter  than  in  the 
former. 


In  Germany  the  whole  practice  of  war  finance  had 
been  carefully  arranged  in  advance.  The  policy  fol- 
lowed was  no  temporary  makeshift  or  hastily  devised 
plan  to  meet  an  emergencj^ ;  it  was  rather  a  deliberate, 
methodical  policy.  The  Reichsbank  remained,  as  it  had 
always  been,  the  central  source  of  credit,  but  in  addition 
to  this  institution  and  the  other  large  banks  which  sup- 

115 


WAR  COSTS  AND  THEIR  FINANCING 


plied  the  needed  loans  to  the  large  manufacturing  and 
trading  establishments,  loan  offices  {Dcuiehenslasscn) 
were  established  for  the  purpose  of  making  loans  to 
small  traders,  merchants,  and  others  whose  security 
would  scarcely  be  acceptable  at  a  commercial  bank.*  The 
loan  offices  were  peculiarly  a  German  institution,  dating 
back  to  experiments  made  in  Prussia  in  1848.  Based 
essentially  upon  the  principle  of  the  pawnshop,  they 
were  authorized  to  loan  upon  merchandise,  securities, 
and  other  collateral  which  might  not  be  acceptable  at 
commercial  banks,  and  made  loans  on  five  classes  of 
collateral  ranging  from  40  per  cent,  of  the  market  value 
of  non-perishable  merchandise  up  to  75  per  cent,  on  the 
obligations  of  the  Empire  or  of  the  German  states. 
The  loans  were  all  made  in  loan-office  notes  {Darlehcns- 
kassenscheine) ,  which  were  made  receivable  for  all  pub- 
lic dues  although  they  were  not  given  the  legal-tender 

■•  Alfhoixgh  this  was  the  orifjinal  purpose,  these  institutions 
came  to  serve  increasingly  the  needs  of  the  states  and  municipali- 
ties as  the  war  continued;  by  the  end  of  the  year  1917  loans  to 
these  agencies  amounted  to  .$1,425,000.'000.  The  following  table 
shows  the  changes  in  the  classes  of  borrowers  (Economist,  Ixxxvi, 
p.  979): 


Classes  of  Borrowers 


Federal  states  and  municipalities. . . 

Savings  banks 

BanlvS,  etc 

Official  war  companies. 

Commerce,  transport,  and  insurance 

Industry 

Agriculture 

Miscellaneous 

Total 


100.0 


116 


PAPER  MONEY  AND  BANK  CREDIT 

quality.  Loans  were  granted  in  amounts  as  small  as 
$25  for  periods  running  from  three  to  six  months  and 
vrere  generally  renewabli?.  The  interest  rate  was  some- 
what higher  than  the  bank  rate,  being  about  6I/2  per 
cent. 

The  four  private  banks  of  issue  were  permitted  to 
redeem  their  notes  in  those  of  the  Reichsbank.  The 
soundness  of  the  note  circulation  which  was  furnished 
the  German  people  during  the  war  depended,  therefore, 
in  the  last  analysis  upon  the  character  of  the  assets 
which  were  beliind  it. 

Before  the  war  one-third  of  the  outstanding  notes  of 
the  Reichsbank  must  be  covered  by  cash  and  the  other 
two-thirds  by  commercial  paper.  After  the  outbreak 
of  the  war,  however,  this  provision  w^as  modified  so  that 
Imperial  Treasury  notes  and  loan-office  notes  were 
counted  as  cash,  and  the  term  "  commercial  paper  " 
was  extended  so  as  to  include  both  Imperial  bonds  with 
a  maturity  of  three  months  and  Imperial  Treasury  bills 
with  average  maturity  of  about  30  days.  In  this  circle 
of  reserves  and  security  one  is  forced  back  finally  to  the 
ultimate  soundness  of  the  securities  held  by  the  Reichs- 
bank and  the  loan  offices,  that  is,  the  bonds  and  bills 
of  the  Imperial  Treasury  and  the  securities  and  mer- 
chandise placed  by  private  individuals  w^ith  the  loan 
offices.  The  former  are  as  good  as,  and  no  better  than, 
the  rest  of  the  German  debt.  The  latter,  whatever  their 
value  at  the  time  they  were  mortgaged,  have  undoubtedly 
shrunk  in  value  with  the  deterioration  of  German  busi- 
ness concerns.  So  far  as  they  represent  solvent  con- 
cerns or  foreign  securities  the  value  of  which  has  not 
fallen,  they  have  not,  of  course,  lost  in  value,  but  such 
must  be  much  the  smallest  proportion. 

It  was  the  boast  of  Germany  that  she  was  able,  prac- 
117 


WAR  COSTS  AND  THEIR  FINANCING 

tically  alone  of  all  the  belligerent  countries,  to  avoid 
a  moratorium.  This  was  done  by  the  methods  indicated, 
that  is,  by  coining  all  forms  of  wealth  into  cash  in  order 
that  everyone  might  have  the  means  immediately  of 
meeting  his  indebtedness.  The  appearance  of  the  avoid- 
ance of  a  moratorium  may  have  been  secured,  but  ulti- 
mately the  liquidation  of  the  securities  pledged  will 
become  inevitable.  There  was  no  difference  in  principle 
between  the  German  and  the  English  or  French  method. 
There  was  simply  a  difference  in  the  period  of  time  at 
which  premoratorium  engagements  should  be  finally 
settled.  History  has  now  recorded  its  verdict  as  to 
which  method  was  the  better.  Like  most  other  phases 
of  German  military  and  financial  preparations  for  the 
war,  the  German  financial  program  was  adapted  to 
a  short  and  victorious  struggle  but  did  not  lend  itself 
well  to  a  prolonged  war. 

The  demand  for  discounts  on  the  part  of  business 
houses  began  earlier  in  Germany  than  in  England  or 
France.  German  business  houses  seemed  to  sense  the 
coming  war  or  were  informed  of  its  approach,  and  they 
began  in  the  latter  part  of  July,  1914,  to  put  their  affairs 
in  order.  The  total  discounts  of  the  Reichsbank,  which, 
however,  included  advances  to  the  Government,  in- 
creased from  $200,000,000  on  July  23,  1914,  to  about 
$700,000,000  on  July  31  and  to  $1,152,000,000  on 
August  15.  The  larger  part  of  these  early  loans  were 
undoubtedly  made  to  meet  the  needs  of  industry  and 
commerce,  but  the  Government  too  called  upon  the 
Reichsbank  to  lend  it  large  amounts.  In  the  first  week 
or  two  nearly  $200,000,000  was  required  for  mobilization 
purposes,  and  during  the  first  two  months  of  war  it  was 
estimated  that  the  Government  received  some  $500,000,- 
000  for  military  and  naval   purposes.      On  the   other 

118 


PAPER  MONEY  AND  BANK  CREDIT 

hand,  the  Government  had  turned  over  to  the  Reichs- 
bank  the  war  chest  of  $51,000,000  in  gold  against  which 
the  Bank  was  authorized  to  issue  three  times  this 
amount  in  notes. 

As  in  the  case  of  the  other  continental  banks,  the 
extension  of  credit  was  made  by  the  issue  of  notes.  As 
the  loans  of  the  Reichsbank  to  the  State  increased,  so 
the  volume  of  issued  notes  expanded.  At  the  end  of 
1914  the  discounts  stood  at  $984,142,000  and  the  note 
issues  at  $1,261,474,000;  at  the  end  of  1915,  they  stood 
at  $1,351,475,000  and  $1,729,480,000,  respectively;  at 
the  end  of  1916,  $2,402,437,000  and  $2,013,665,000;  at 
the  end  of  1917,  $3,649,025,000  and  $2,866,935,000,  with 
Treasury  notes  amounting  to  $326,195,000  on  the  same 
date;  and  at  the  end  of  1918  the  discounts  and  note 
issues  were  $4,167,725,000  and  $3,122,600,000,  respec- 
tively. Thus  the  average  note  circulation  for  1914  was 
$729,500,000;  for  1915,  $1,352,250,000;  for  1916,  $1,171,- 
500,000 ;  and  for  1917,  $2,500,000,000.  At  the  same  time 
the  loan-office  notes  in  circulation  showed  an  equally 
steady  expansion,  from  $192,000,000  at  the  end  of  1915 
to  $718,500,000  at  the  end  of  1916,  $1,566,500,000  at  the 
end  of  1917,  and  $2,527,000,000  at  the  end  of  1918.  The 
total  notes  in  circulation  on  July  23  of  each  year  were : 


Notes  in  Circulation  in  Germany 

(In  millions) 


July  23 

Reichsbank 
notes 

Treasury 
notes 

Loan  office 
notes 

1914 

$473.0 
1,328.5 
1,710.0 
2,157.5 
3,142.5 

$34.5 
72.0 
80.0 
85.0 
86.0 

1915 

174  5 

1916 

318  0 

1917 

1,137.0 

1918 

1,896.5 

119 


WAR  COSTS  AND  THEIR  FINANCING 

The  note  issues  expanded  so  greatly  that  the  Govern- 
ment itself  was  alarmed  and  sought  to  restrict  the  use 
of  paper  money  by  encouraging  the  habit  of  settling 
accounts  by  means  of  checks  and  other  credit  instru- 
ments. The  use  of  postal  money  orders  was  agitated 
and  encouraged  by  financial  journals,  and  the  banks 
sought  to  educate  the  people  in  the  use  of  checks. 
These  efforts  bore  their  fruit,  and  deposits  at  the 
Reichsbank  rose  from  $236,000,000  on  July  23,  1914,  to 
$1,977,500,000  on  July  6,  1918,  these  figures,  however, 
including  Government  deposits  as  well  as  private 
deposits.  In  estimating  the  degree  of  inflation  which 
took  place  in  Germany  the  increase  of  the  credit  cur- 
rency must  be  taken  into  account  as  well  as  the  issues  of 
circulating  notes.  The  note  issues  of  the  private  note- 
issuing  banks,  on  the  other  hand,  remained  almost 
stationary.  These  increased  by  only  $15,000,000  between 
July  23,  1914,  and  June  30,  1918,  the  change  being  from 
$390,000,000  to  $405,000,000. 

The  greatest  expansion  of  the  currency  in  Germany, 
however,  occurred  after  July,  1918.  When  the  German 
retreat  began,  the  people  began  a  run  on  the  banks  just 
as  they  had  at  the  beginning  of  the  war.  The  events  of 
this  period  are  best  described  in  a  report  made  by  Herr 
Havenstein,  the  President  of  the  Reichsbank  :^ 

There  was  a  ran  on  the  bank,  September  23-October  23, 
unparalleled  in  its  history.  People  feared  a  moratorium  or 
the  insolvency  of  the  banks,  and  hoarding  took  place  on  a 
large  scale.  The  total  circulation  increased  2,051.7  million 
marks  [$662,900,000]  in  the  period  September  24-Oetober  23, 
as  against  734.0  million  marks  [$183,500,000]  in  the  same 
period  last  year  [1917].    In  the  quarter,  July  1-September  30, 

^  Report  of  Herr  Havenstein  to  the  Central  Committee  of  the 
Reichsbank  on  lack  of  instruments  of  payment,  Frankfurter 
Zeitung,  Oct.  31,  1918. 

120 


PAPER  MONEY  AND  BANK  CREDIT 

the  Reichsbank  added  4,325.5  million  marks  [$1,081,400,000] 
to  the  instniracnts  of  payment,  which  far  surpassed  any  pie- 
ceding  quarter.  The  withdrawals  of  new  currency  from  the 
Reichsbank  equalled  1,493  million  marks  [$373,250,000]  in 
the  first  three  weeks  of  October,  1918.  The  net  addition  to 
the  currency  for  the  period,  July  1-October  23,  was  thus  5,484.2 
million  marks  [$1,371,000,000]  — the  highest  amount  during 
any  war  loan. 

Unhappily  the  official  printing  press  was  unequal  to  the 
emergency  owing  to  the  calling  of  a  number  of  its  workers 
to  the  army  and  the  absence  of  hundreds  of  others  because  of 
grijipe.  Early  in  October  the  towns  were  asked  to  prepare 
immediately  notes  up  to  50  marks  [$12.50].  By  November  1 
over  400  million  marks  [$100,000,000]  of  this  emergency 
money  had  been  issued,  and  during  the  weeks  following  a 
similar  amount  was  put  into  circulation.  The  coupons  of  the 
five  i")er  cent,  war  loan,  due  January  2,  1919,  were  declared 
by  the  decree  of  the  Bundesrat  to  be  legal  tender.  This 
amounted  to  600  million  marks  [$150,000,000],  which  will  be 
increased  by  another  300  million  marks.  [$75,000,000]  as  soon 
as  the  eighth  war  loan  is  issued. 

The  four  private  banks  of  issue  augmented  their  output  to 
the  legal  limit. 

It  is  evident  from  the  operations  of  the  Reichsbank 
and  the  loan  offices  that  the  assistance  granted  both  to 
private  industry  and  to  the  Government  by  the  credit 
institutions  of  Germany  took  the  form  primarily  of  the 
issue  of  notes.  As  the  Government  needs  expanded, 
additional  sums  were  put  into  circulation  without  any 
regard  to  the  monetary  demands  of  the  community,  but 
solely  in  response  to  the  fiscal  necessities  of  the  Treasury. 
This  confusion  of  functions  on  the  part  of  the  note- 
issuing  agencies  led  to  an  enormous  inflation  of  the 
currency  with  its  consequent  de'preciation  and  a  rise 
of  prices.  The  result  was  that  the  Government  was 
forced  to  pay  more  for  its  supplies  and  services  as  the 
war  continued,  owing  to  the  steady  depreciation  in  the 

121 


WAR  COSTS  AND  THEIR  FINANCING 

value  of  the  monetary  unit.  Germany  slid  rapidly 
from  a  would-be  scientific  system  of  credit  into  the  abyss 
of  practically  fiat  paper  money.  That  this  is  not  too 
strong  a  statement  may  be  seen  from  the  ratio  of 
reserves  to  note  issues.  On  July  23,  1914,  the  gold 
reserve  amounted  to  $339,215,000  against  notes  issued 
to  the  amount  of  $-172,720,000  and  total  liabilities  of 
$718,700,000.  On  December  23,  1918,  the  gold  reserve 
had  increased  to  $565,655,000,  but  the  notes  had  mean- 
while expanded  to  $5,281,080,000  and  the  total  liabilities 
had  grown  to  $8,536,040,000.  The  ratio  of  gold  reserves 
to  notes  had  therefore  fallen  in  the  interval  from  71.7 
per  cent,  to  10.7  per  cent.,  and  the  ratio  of  gold  to  notes 
and  deposits  from  47.8  per  cent,  to  6.9  per  cent. 

As  Austria-Hungary,  the  hotbed  of  the  European 
conflict,  declared  war  on  Serbia  on  July  28,  1914,  its 
banks  felt  the  shock  to  credit  earlier  than  those  in  the 
other  countries.  There  were  immediately  runs  on  the 
Imperial  Austro-Hungarian  Bank  and  demands  by  busi- 
ness houses  for  accommodation.  These  were  met  by  the 
passage  of  a  limited  moratorium,  which  was  later  made 
permanent,  and  by  authorizing  the  banks  to  refuse  to 
pay  more  than  three  per  cent,  of  the  checks  presented 
and  three  per  cent,  of  their  customers'  current  accounts. 
On  August  5  the  requirement  that  the  Imperial  Bank 
should  hold  a  metallic  reserve  against  notes  issued  was 
suspended,  which  meant  the  suspension  of  specie  pay- 
ments. At  the  same  time  the  publication  of  the  Bank 
reports  was  prohibited.  These  were  not  published  again 
until  December,  1917,  but  as  statements  were  then  given 
which  covered  the  earlier  years,  it  is  possible  to  trace 
in  a  general  way  the  course  of  the  intervening  operations. 
These  are  shown  in  the  following  table : 

122 


PAPER  MONEY  AND  BANK  CREDIT 


Condition  of  Imperial  Austro-Hungaetan  Bank,  End  op  Year, 
1913-19178 

(Jn  millions) 


1913 

1914 

1915 

1916 

1917 

Gold 

$248.0 
12.0 
52.3 

185.2 
62.1 

$214.0 

2.8 

25.1 

410.6 

678.9 

$139.0 
12.0 
13.2 

595.4 
658.6 

78.3 

46.8 

1,432.5 

54.6 

$59.0 

1.1 

11.7 

571.3 
685.6 

735.6 

324.3 

2,177.7 
85.0 

$52.8 

Foreign  exchange 

Silver  coin  and  bullion. .  .  . 

Discounted  bills,  warrants, 

etc 

12.0 
11.3 

564.4 

Loans  on  securities 

Advances  to  Austrian  Gov- 
ernment    

685.8 
1,808.0 

Advances     to     Hungarian 
Government 

831.6 

Bank  notes  in  circulation . 
Deposits 

498.7 
37.5 

1,027.0 

285.4 

3,687.9 
391.6 

The  most  striking  thing  r.bout  this  table  is  the  ahnost 
complete  disappearance  of  the  metallic  reserve.  Much 
silver  coin  was  paid  out  in  the  early  days  of  the  war  to 
supply  the  need  for  small  coins,  but  these  were  soon 
withdrawn  from  circulation  and  hoarded  by  the  people. 
No  such  dissipation  of  the  gold  reserve  took  place,  as 
the  Bank  had  been  relieved  of  the  necessity  of  redeem- 
ing its  notes  in  gold  and  naturally  did  not  pay  it  over 
the  counter.  Its  disappearance  was  obviously  the  result 
of  its  utilization  by  the  German  Reichsbank  either  di- 
rectly by  being  added  to  its  own  reserve  or  indirectly  by 
exportation  to  neutral  countries  on  Germany's  account, 
though  a  cleaner  sweep  could  scarcely  have  been  made 
if  the  Austro-Hungarian  Bank  had  been  looted  outright. 
It  is  very  significant  that  the  gold  reserves  of  the  Bank 
of  Turkey  dwindled  in  similar  fashion,  while  the  reserves 
of  the  German  Reichsbank  showed  a  steady  and  continu- 


'  Report  of  Imperial  Austro-Hungarian  Bank,  December  7,  1917. 

123 


WAR  COSTS  AND  THEIR  FINANCING 

ous  increase  throughout  most  of  the  period  of  the  war. 
Whatever  the  explanation,  the  result  was  the  same.  The 
gold  cover  of  the  Austro-Hungarian  bank  notes,  which 
before  the  war  was  fixed  by  law  at  40  per  cent.,  was 
steadily  reduced.  A  year  later  it  was  22.9  per  cent, 
at  the  end  of  1915  it  was  9.4  per  cent.,  of  1916,  2.7  per 
cent. ;  and  by  the  end  of  1917  it  had  sunk  to  the  negli- 
gible figure  of  1.6  per  cent.  At  this  point  the  note 
issues  were  practically  inconvertible  fiat  money. 

The  increase  in  the  issue  of  bank  notes  took  place  at 
an  even  more  rapid  rate  than  the  decline  in  the  metallic 
reserve.  As  deposit  banking  was  but  slightly  developed 
in  the  Dual  Monarchy,  the  extension  of  banking  credit 
took  the  form  almost  exclusively  of  the  issue  of  bank 
notes.  This  is  shown  by  the  slight  increase  in  deposits 
as  compared  with  the  enormous  expansion  of  note  issues. 
These  stood  at  $425,800,000  on  July  23,  1914,  just  before 
the  outbreak  of  the  war;  by  the  end  of  1915  they  had 
risen  to  $1,432,500,000 ;  of  1916,  to  $2,177,700,000 ;  and 
of  1917,  to  $3,687,900,  000.  The  year  1918  saw  the  issues 
increase  at  an  accelerating  rate.  In  April  they  were 
$4,060,000,000 ;  in  July,  $4,600,000,000 ;  and  by  October 
1,  $5,400,000,000.  On  January  23,  1919,  the  note  issues 
had  grown  to  the  enormous  total  of  $6,434,400,000. 
Excuses  were  found  for  these  additions  to  the  circulating 
medium  first  in  the  need  of  notes  to  take  the  place  of 
the  hoarded  gold  and  in  the  increased  activities  of  the 
State.  Later  it  was  asserted  that  more  money  was 
needed  for  circulation  in  the  conquered  territories  of 
Poland  and  Serbia,  and  still  later  of  Rumania.  Finally, 
the  need  for  a  larger  circulating  medium  because  of 
higher  prices  was  urged.  Here  is  seen  the  real  evil  of 
a  policy  of  financing  a  war  by  issues  of  paper  money. 
Over-issue  means  inflation  and  a  depreciation  of  the 

124 


PAPER  MONEY  AND  BANK  CREDIT 

paper-money  units  with  consequent  higher  prices.  Not 
only  is  the  cost  of  living  raised  thereby  to  private  indi- 
viduals, but  the  Government  itself  is  forced  to  pay  more 
for  all  its  supplies.  At  the  same  time  it  sells  its  bonds 
and  other  obligations  for  a  cheaper  money  unit  the 
purchasing  power  of  which  is  constantly  declining. 
Such  a  policy  is  improvident  when  the  Government 
itself  issues  inconvertible  paper  money;  when  it  author- 
izes a  bank  to  inHate  the  currency,  the  policy  is  suicidal. 
The  depreciation  of  the  Austro-ITungarian  bank 
money  may  be  shown  by  a  few  figures.  The  decline 
began  almost  immediately  after  the  outbreak  of  the  war 
and  continued  uninterruptedly ;  by  the  end  of  December, 
1915,  the  krone  showed  a  depreciation  in  Zurich  of 
41  per  cent. ;  in  New  York,  of  44  per  cent. ;  and  in 
Amsterdam,  of  52  per  cent.  At  the  same  time  the  cost 
of  living  rose  by  leaps  and  bounds.  A  report  of  the 
Vienna  Board  of  Trade  showed  that  in  July,  1915, 
prices  were  86  per  cent,  higher  than  they  had  been  a 
year  before.  The  mad  dance  of  inflation  went  on 
through  the  next  three  years  at  an  even  faster  pace, 
and  by  the  end  of  1918  prices  had  reached  heights  that 
were  reminiscent  of  the  assignats  during  the  French 
Revolution.  The  following  table  shows  some  typical 
prices  as  quoted  at  Budapest  for  November  12,  1918 : 

Commodities  Wages 

Milk,  per  litre  [quart]...   .$.40  Driver,   per  day $6.00 

Cabl)age,  per  head 5.67  Coal  shoveler,  per  day...    5.00 

Steak.      per      kilo       [2.2  Day  laborer,  per  day 4.20 

pounds] 4.00  Grave  digger,  per  day.  .  . 

Other  meat,  per  kilo 4.00  8.00-10.00 

Incomplete  as  this  table  is,  it  illustrates  one  unhappy 
result  which  always  follows  the  depreciation  of  a 
currency  through  inflation.     Although   nominal  wages 

125 


WAR  COSTS  AND  THEIR  FINANCING 

showed  an  enormous  increase,  reaching  undreamed-of 
heights,  they  still  lagged  behind  prices,  so  that  there 
was  a  steady  decline  in  real  wages.  By  the  end  of  1918 
the  political  situation  had  become  so  desperate  that  the 
depreciated  bank  notes  had  practically  ceased  to  serve 
the  purpose  of  money,  and  trade  had  become  mere  barter 
of  commodities.  In  November,  1918,  the  Government 
announced  that  it  would  issue  temporary  bank  notes  in 
denominations  of  25  and  100  kronen  to«neet  the  scarcity 
of  currency  which  followed  the  general  panic  in  the 
country.  The  frightened  people  had  made  runs  on  the 
banks  to  such  an  extent  that  the  available  supply  of 
notes  had  been  completely  exhausted  and  payments  were 
being  made  in  war-loan  coupons  and  Treasury  bills.  By 
the  end  of  the  year  a  complete  financial  collapse  had 
taken  place  and  there  was  widespread  bankruptcy 
throughout  the  eountr}^  Retail  trade  in  Vienna  was 
ruined  and  panic  permeated  all  economic  activities. 
Prices  were  fantastic  and  trade  had  become  a  gamble. 

The  other  items  in  the  bank  statement  given  on  page 
123  combine  to  show  the  complete  subordination  of  the 
Bank's  normal  activities  to  the  demands  of  the  Govern- 
ment for  aid  in  financing  the  war.  It  is  impossible 
to  say  how  much  of  the  item  "  Discounted  bills, 
warrants,  etc.,"  were  on  private  account  and  how  much 
for  the  Government,  but  it  is  safe  to  say  that  by  the 
end  of  the  war  practically  all  loans  of  the  Bank  were 
made  against  Treasury  bills.  Private  commercial  paper 
had  virtually  disappeared  from  the  market,  and  in  lieu 
of  this  the  Bank's  portfolio  was  filled  with  Government 
obligations.  ' '  Loans  on  security  ' '  were  doubtless  loans 
made  upon  war  bonds  and  Treasury  bills  to  permit  the 
borrower  to  subscribe  to  new  issues  of  bonds.  The 
Bank  loaned  up  to  75  per  cent,  of  the  nominal  value  of 

126 


PAPER  MONEY  AND  BANK  CREDIT 

the  bouds  for  this  purpose  at  a  rate  of  interest  one-half 
of  one  per  cent,  more  than  the  interest  on  the  bonds. 
The  former  of  these  two  items  showed  its  greatest 
increase  in  191J:  and  1915  and  the  latter  in  1914,  after 
which  periods  they  remained  fairly  constant.  As  a 
result  of  these  operations  there  was  a  great  expansion 
in  bank  credit  which  played  its  pavt  in  the  continuous 
inflation  and  consequent  rise  in  prices. 

But  the  most  significant  feature  of  the  statement  is 
to  be  found  after  all  in  the  two  items  of  "  Advances  to 
the  Government."  These  did  not  begin  until  1915.  In 
the  first  part  of  the  Avar  the  calls  upon  the  Imperial 
Bank  were  indirect.  To  procure  funds  to  meet  its  needs 
the  Government  entered  into  an  arrangement  with  the 
Bank  by  which  it  was  to  advance  money  in  return  for 
Treasury  bills,  which  it  agreed  to  sell  to  the  public  on 
commission.  The  first  call  was  for  $190,000,000.  Treas- 
ury bills  to  this  amount  were  issued  to  the  Bank  (of 
which  Austria  took  $120,000,000  and  Hungary  $70,000,- 
000)  whi<»h  it  then  sold  to  a  consortium  of  bankers, 
which  in  turn  borrowed  the  requisite  cash  from  tire 
Bank  on  the  security  of  these  same  bills.  But  the  needs 
of  the  Government  were  too  great  to  permit  it  to  use 
the  Bank  only  as  a  brokerage  firm.  I-t  soon  made  direct 
appeals  to  the  Bank  itself  for  funds,  which  the  Bank 
granted  by  discounting  Treasury  bills  freely.  These 
operations  are  reflected  in  the  doubling  of  the  item 
"  Discounted  bills,  warrants,  etc.,"  between  the  end  of 
1913  and  1914  and  the  ten-fold  increase  of  the  item 
"  Loans  on  security,"  though  it  is  not  possible  to 
separate  the  Government  operations  from  those  of 
private  borrowers.  The  magnitude  of  the  Treasury 
borrowings  was  so  great,  however,  that  most  of  the 
increase  must  be   credited   to   Government   operations. 

127 


WAR  COSTS  AND  THEIR  FINANCING 

The  year  1916  and  the  following  saw  a  still  more  direct 
utilization  of  the  Bank's  resources  by  direct  advances 
to  the  Government.  By  the  end  of  1917  these  amounted 
to  $2,600,000,000. 

It  is  clear  from  even  this  brief  summary  that  the 
normal  commercial  functions  of  the  Bank  were  com- 
pletely subordinated  during  the  course  of  the  war  to  the 
financial  needs  of  the  Government.  It  had  become 
simply  a  manufactory  of  credit  and  an  issuer  of  fiat 
money.  The  gold  reserve,  originally  back  of  its  notes, 
had  entirely  disappeared,  and  the  latter  w^ere  based,  so 
far  as  there  was  any  security  back  of  them,  upon  the 
Bank's  holdings  of  Government  securities.  The  assets 
of  the  Bank  were  as  good  as,  and  no  better  than,  the 
credit  of  the  Dual  Monarchy.  The  solvency  of  the 
former  was  clearly  dependent  upon  that  of  the  latter. 
With  the  collapse  of  the  political  structure  of  the  Empire 
the  insolvency  of  the  Imperial  Austro-Hungarian  Bank 
became  inevitable. 

In  addition  to  the  vast  issues  of  bank  notes  which 
were  put  out  in  all  the  belligerent  countries  by  the 
central  note-issuing  institutions,  several  of  the  belligerent 
Governments  added  to  the  mass  of  currency  by  direct 
issues  of  paper  money.  Great  Britain  authorized  the 
issue  of  currency  notes  in  denominations  of  $5  and  $2.50 
by  the  Currency  and  Bank  Note  Act  of  August  6,  1914, 
and  made  them  unlimited  legal  tender.  This  constituted 
such  a  marked  departure  from  previous  British  practice 
that  it  has  been  referred  to  as  ''  the  currency  revolu- 
tion."^ The  issue  of  these  currency  notes  steadily 
increased  from  $102,390,000  on  December  30,  1914,  to 
$515,625,000  on  December  29,  1915;  $2,750,720,000  on 

'  H.  J.  Jennings,  Nineteenth  Century  and  After,  November, 
1914. 

128 


PAPER  MONEY  AND  BANK  CREDIT 

December  27,  1916;  $1,063,910,000  on  December  26, 
1917;  and  $1,616,205,000  on  December  31,  1918.  As 
the  coin  and  bullion  held  in  the  redemption  account 
remained  practically  fixed  at  $142,500,000,  the  ratio  of 
reserve  to  notes  steadily  fell  until  on  the  last  named 
date  it  was  only  8.9  per  cent. 

Canada  had  issued  Dominion  notes  before  the  war, 
amounting  on  June  30,  1914,  to  $114,182,100,  against 
which  the  Treasury  held  $92,663,375  in  gold.  During 
the  war  these  issues  were  almost  trebled,  the  notes  out- 
standing on  March  31,  1919,  amounting  to  $298,058,698. 
As  the  amount  of  Dominion  notes  issued  increased,  the 
security  back  of  them  diminished.  The  regulations  cov- 
ering the  issue  of  Dominion  notes  had  permitted  an 
issue  of  $30,000,000  of  notes  against  a  25  per  cent,  gold 
reserve.  Any  further  issue  was  to  be  covered  by  a  100 
per  cent,  reserve.  By  the  Dominion  Notes  Act  of 
August,  1914,  the  amount  of  notes  that  could  be  issued 
against  a  25  per  cent,  reserve  was  raised  to  $50,000,000 ; 
under  the  provisions  of  the  Finance  Act  of  1914  the 
Minister  of  Finance  was  authorized  to  issue  Dominion 
notes  to  banks  upon  deposit  with  them  of  approved 
securities;  and  subsequent  acts  permitted  additional 
issues  under  different  conditions.  Of  the  new  notes 
some  $23,000,000  was  issued  against  deposits  of  gold; 
over  $70,000,000  was  issued  to  banks  upon  deposit  of 
approved  securities ;  some  $16,000,000  was  advanced  tt> 
the  railways;  $50,000,000  consisted  of  advances  to  the 
British  Government  on  its  securities;  and  the  balance 
was  issued  without  additional  security.  As  a  result  of 
this  serious  dilution  of  the  currency,  as  well  as  of  other 
causes,  there  has  occurred  in  Canada  the  same  rise  in 
prices  that  has  taken  place  in  all  the  other  countries. 
In  view  of  the  excellent  banking  system  of  Canada  it 

129 


WAR  COSTS  AND  THEIR  FINANCING 

would  seem  that  a  resort  to  direct  issues  of  paper  money 
by  the  Government  might  have  been  avoided. 

In  Australia  the  issuance  of  the  fiduciary  money  in 
use  in  the  Commonwealth  had  been  taken  over  from 
the  banks  by  the  Government;  the  direct  issue  of  notes 
by  the  latter,  therefore,  stands  on  a  somewhat  different 
footing  from  similar  issues  in  other  countries.  In  1910 
the  Commonwealth  Treasurer  was  empowered  to  issue 
notes  in  denominations  of  $2.50  and  up,  which  should 
be  legal  tender  throughout  the  Commonwealth  and 
redeemable  at  the  seat  of  the  Federal  Government. 
Against  these  notes  the  Treasurer  was  to  hold  a  reserve 
of  gold  amounting  to  25  per  cent,  up  to  $35,000,000  and 
100  per  cent,  of  all  notes  in  excess  of  that  amount.  At 
the  same  time  the  circulation  of  state  notes  was  prohibited, 
and  a  tax  of  10  per  cent,  per  annum  was  imposed  on 
bank  notes  issued  after  the  passage  of  the  act.  The 
provision  as  to  reserves  was  amended  in  1911  by  provid- 
ing that  the  gold  reserve  need  be  only  25  per  cent, 
irrespective  of  the  amount  of  notes  issued,  and  by  the 
end  of  1911  the  Australian  notes  were  practically  the 
only  credit  money  in  circulation  in  the  Commonwealth. 
Early  in  the  war  specie  payments  were  suspended,  and 
the  redemption  of  the  notes  ceased  for  the  period  of  the 
war.  The  note  issues  have  shown  a  considerable  increase, 
and  as  a  result  the  gold  reserve  has  formed  a  smaller 
and  smaller  proportion  of  the  outstanding  issues.  For 
the  period  August  to  December,  1911,  the  total  note 
issue  amounted  to  $71,665,040;  by  December  1915,  it 
was  $159,184,250;  by  December,  1916,  it  was  $221,920,- 
195 ;  and  in  December,  1917,  it  was  $239,506,345.«  At 
the  same  time  the  gold  reserve  declined  from  45.22  per 

*  Official  Yearbook  of  Common  weal  tfi  of  Australia,  1016,  pp. 
706,  742;  Federal  Reserve  Biillelii).  April.   19lS.  p.  273. 

130 


PAPER  MONEY  AND  BANK  CREDIT 

cent,  on  December  27,  1913,  to  40.27  per  cent,  on 
December  30,  1914 ;  to  36.09  per  cent,  on  June  30,  1916 ; 
and  to  32.38  per  cent,  on  May  30,  1917. 

If  any  of  the  countries  that  resorted  to  direct  issues 
of  paper  money  by  the  Government  was  justified  in  so 
doing,  it  would  seem  to  have  been  Italy.  In  that  country 
the  taxes  had  already  constituted  a  grievous  burden 
before  the  outbreak  of  the  war,  and  it  was  difficult  to 
screw  them  up  very  much  higher.  The  poverty  of  the 
people,  moreover,  made  it  impossible  to  secure  the  large 
amounts  in  popular  loans  which  were  obtained  in  other 
belligerent  countries.  The  Government  accordingly 
pursued  the  apparently  easy  method  of  issuing  its  own 
notes  in  payment  of  its  expenditures.  These  issues  grew 
rapidly  until  by  tlie  end  of  1917  tliey  amounted  to 
$349,760,000.  One  year  later,  on  December  31,  1918, 
tliey  had  increased  still  further  to  $430,800,000. 

Germany,  not  content  with  providing  for  the  enlarged 
issue  of  bank  notes  by  the  Reiclisbank  noted  above  and 
creating  a  new  form  of  money  in  the  loan-office  notes, 
also  increased  the  issues  of  Imperial  Treasury  notes 
{Reiclisl'assenscheine) .  These  notes  were  obligations  of 
the  Imperial  Government,  payable  to  bearer  on  demand, 
redeemable  at  the  Reiclisbank  in  cash,  and  acceptable 
at  all  public  offices  for  public  dues.  At  the  time  of  the 
outbreak  of  the  war  the  authorized  issue  was  $60,000,000. 
Since  these  notes  circulated  as  money  and  were  held  by 
the  Reichsbank  as  part  of  its  cash  reserve,  they  may 
fairly  be  regarded  as  constituting  direct  issues  of  paper 
money  by  the  Government.  They  were  issued  in 
denominations  of  $1.25  and  upwards,  and  on  August  4, 
1914,  were  made  legal  tender.  The  suspension  of  specie 
payments  on  the  same  day  made  them  inconvertible.  The 
amount  of  these  notes  in  circulation  was  as  follows : 

131 


WAR  COSTS  AND  THEIR  FINANCING 


Geeman  Treasury  Notes  in  Circulation,  1914-1918 


July  23 

In  Circulation 

In  Reichsbank 

1914 

$34,500,000 
72,000,000 
80,000,000 
85,000,000 
86,000,000 

$8,300,000 

1915     

64,347,000 

1916... 
1917... 
1918. . . 

104.020,000 
131,310,000 
435,905,000 

An  adequate  appreciation  of  the  services  rendered  by 
the  Federal  Reserve  System  in  the  United  States  during 
the  war  can  be  obtained  only  if  American  banking 
methods  as  they  existed  prior  thereto  are  fully  under- 
stood. In  1914  there  were  some  7,500  national  banks 
with  combined  capital,  surplus,  and  deposits  of  about 
$9,000,000,000,  and  perhaps  20,000  state  banks,  private 
banks,  and  trust  companies  with  capital,  surplus,  and 
deposits  of  about  $14,000,000,000.  In  spite  of  their 
name  the  national  banks  were  essentially  local  in  their 
business  and  independent  of  each  other,  being  brought 
together  only  by  the  loose  association  of  banks  in  the 
clearing  houses.  The  national-bank  system  had  been 
established  at  the  time  of  the  Civil  War  to  provide  a 
market  for  war  bonds  and  to  supply  the  country  with  a 
uniform  currency.  These  services  had  been  performed 
efficiently,  but  in  the  half  century  that  had  elapsed  since 
1863  the  country  had  outgrown  the  rigid  and  defective 
system  then  established.  The  most  serious  defects  of 
our  former  national  banking  system  have  been  summed 
up  by  a  recent  writer^  under  the  four  heads  of 
decentralization,    inelasticity     of     credit,     cumbersomf" 

^  E.   W.   Kemmerer,   The  ABC  of  the  Federal  Reserve  System 
'Princeton,  1918),  p.  2. 

132 


PAPER  MONEY  AND  BANK  CREDIT 

exchange  and  transfer  system,  and  defective  organiza- 
tions as  regards  relationship  with  the  Federal  Treasury, 

The  banks  of  the  country  were  not  only  scattered 
geographically,  but  they  were  without  effective  union  or 
leadership.  In  good  weather  each  sailed  on  its  own 
course ;  in  storm  each  had  to  depend  upon  itself.  If 
a  crisis  came  and  reserves  were  drawn  upon,  no  banker 
could  look  to  his  neighbor  for  assistance  because  the 
salvation  of  each  depended  upon  his  keeping  his  own 
reserve  intact.  The  reserves,  moreover,  were  widely 
scattered  and  also  immobile,  in  that  they  could  not  be 
quickly  moved  and  massed  at  one  place  in  time  of  need. 
This  was  peculiarly  wasteful  in  a  country  like  the 
United  States  where  the  currency  demands  of  trade, 
commerce,  industry,  and  agriculture  alternate  and  vary 
from  place  to  place  and  from  time  to  time.  The  crops 
of  the  West  and  Middle  "West  drain  the  eastern  money 
market  at  one  season ;  the  cotton  movement  of  the  South 
demands  financing  at  another ;  the  shipping  at  seaboard 
cities  makes  intermittent  and  at  times  coincident  de- 
mands in  the  East;  and  the  industrial  sections  require 
attention  the  year  around. 

The  inelasticity  of  the  bank-note  circulation  was 
notorious.  Based  as  it  was  upon  the  deposit  of  Govern- 
ment bonds,  it  was  limited  by  the  size  of  the  national 
debt  and  fluctuated  inversely  with  the  price  of  the 
bonds  rather  than  directly  according  to  the  needs  of 
commerce.  Rigid  regulations  as  to  bank  reserves  had 
the  effect  of  limiting  also  the  elasticity  of  bank  credit 
in  the  form  of  deposits.  The  reserve  requirement  limited 
banking  practically  to  75  per  cent. ;  lack  of  a  rediscount- 
ing  market  tied  up  bank  paper  until  maturity;  the 
necessity  of  having  liquid  assets  practically  confined  the 
extension  of  bank  credits    (at  least  in  central  reserve 

133 


WAR  COSTS  AND  THEIR  FINANCING 

cities,  where  the  larger  reserves  were  held)  to  "  call  " 
paper  eollateraled  by  stock-exchange  securities.  This 
tended  to  centralize  hanking  in  New  York  and  to  a  less 
extent  in  Chicago  and  St.  Louis.  Wall  Street  had  hank 
credit,  hut  the  farmer  did  not;  he  had  no  "  liquid 
assets  "  to  offer. 

The  old  banking  system  possessed  also  certain  defects 
in  the  mechanism  of  domestic  and  foreign  exchange. 
Although  the  clearing-house  machinery  was  highly 
perfected  for  the  settlement  of  local  checks,  there  was 
considerable  loss  of  time  and  expense  in  caring  for 
checks  from  distant  points  or  drafts  on  foreign  coun- 
tries. But  perhaps  the  most  obvious  defect  in  the  old 
system  was  the  lack  of  correlation  between  the  fiscal 
operations  of  the  Government  and  the  movement  of 
commercial  credits.  According  to  the  original  theory 
the  funds  of  the  Government  were  to  be  kept  in  the 
independent  Treasury  and  its  branches,  known  as  sub- 
treasuries.  This  theory,  however,  had  been  widely 
departed  from,  and  at  the  end  of  June,  1914,  the 
Government's  funds  were  deposited  in  some  1,581 
national  banks  as  well  as  in  the  Government's  own 
vaults.  Even  this  dispersion  of  the  Government  funds 
did  not  altogether  remedy  the  earlier  evils  of  complete 
periodic  withdrawal  of  cash  from  circulation,  and  on 
the  other  hand  it  led  the  depository  banks  to  rely 
unduly  upon  the  Secretary  of  the  Treasury  for  relief  in 
times  of  financial  pressure. 

This  system  had  been  modified  by  patcliM'ork  legisla- 
tion, but  it  remained  for  the  Federal  Reserve  System  to 
place  the  American  banking  system  upon  an  entirely 
new  basis  and  to  reorganize  the  machinery  so  as  to 
adapt  it  more  adequately  to  the  needs  of  the  twentieth 
century.     It  must  be  regarded  as  providential  that  the 

134 


PAPER  MONEY  AND  BANK  CREDIT 

.system  was  got  into  running  order  within  tiiree  months 
after  the  outbreak  of  the  World  War. 

The  Federal  Reserve  System,  which  was  designed  to 
unify  the  national  and  state  banks  and  trust  companies 
throughout  the  United  States  into  an  integrated  financial 
organism,  became  operative  in  November,  1914.  The 
country  was  divided  into  12  districts,  in  each  of  which 
was  established  a  Federal  Reserve  Bank  situated  in  the 
logical  banking  center  of  the  district.  All  national 
l)anks  were  required  to  become  members  of  the  system, 
and  state  banks  and  trust  companies  were  urged  to  join. 
The  capital  of  the  Federal  Reserve  Bank  in  each  district 
was  subscribed  by  the  member  banks  in  proportion  to 
their  capital  and  surplus.  At  the  head  of  the  system 
stands  the  Federal  Reserve  Board  at  Washington.  By 
means  of  this  organization  it  has  been  possible  to  effect 
a  centralization  not  only  of  administration,  but  also  of 
reserves  and  banking  power.  The  legal  reserves  of  the 
member  banks  are  kept  on  deposit  in  the  Federal  Reserve 
Bank  of  the  district,  although  each  bank  also  keeps  a 
certain  amount  of  "  counter  cash  "  on  hand,  which, 
however,  is  not  reckoned  as  a  part  of  the  legal  reserve. 
This  centralization  of  reserves  permitted  such  efficient 
and  economical  use  of  them  that  it  became  possible  very 
materially  to  reduce  the  reserve  requirements  of  the 
banks.  Those  in  the  central  reserve  cities  were  per- 
mitted to  reduce  their  reserves  from  25  to  18  per  cent, 
and  finally  in  1917  to  13  per  cent.  Similarly,  the  reserve 
city  banks  were  permitted  to  reduce  their  reserves  from 
15  to  10  per  cent.,  and  the  country  banks  are  now 
required  to  maintain  a  reserve  of  only  seven  per  cent. 

The  gold  reserve  was  not  only  centralized,  it  was  by 
this  very  fact  also  rendered  more  mobile.  Federal  Re- 
serve Banks  were  permitted  to  rediscount  member  banks ' 

135 


WAR  COSTS  AND  THEIR  FINANCING 

paper,  more  liberality  was  granted  in  dealing  with  the 
outside  public,  and  the  greater  use  of  trade  acceptances 
and  bank  acceptances  created  a  broader  discount  mar- 
ket for  commercial  paper,  thus  permitting  a  freer  flow 
of  funds  from  bank  to  bank  and  from  district  to 
district.  In  this  way  the  localism  and  lack  of  coopera- 
tion of  the  old  system  has  been  effectually  remedied. 
The  final  step  in  the  mobilization  of  the  gold  reserves 
was  taken  by  the  establishment  at  Washington  in  May, 
1915,  of  a  Oold  Settlement  Fund,  to  which  each  Federal 
reserve  bank  was  compelled  to  contribute  and  maintain 
as  a  balance  not  less  than  $1,000,000.  Settlement  of 
balances  between  the  Federal  Reserve  Banks  is  effected 
daily  by  a  mere  bookkeeping  transfer  of  the  gold  held  in 
the  Fund,  thus  obviating  almost  completely  the  neces- 
sity of  shipping  money  between  Federal  Reserve  Banks. 

The  foremost  service  of  the  Federal  Reserve  System 
has  been  the  establishment  of  a  real  asset  currency  based 
on  commercial  paper  created  to  finance  trade  and  pro- 
duction and  protected  by  a  40  per  cent,  gold  reserve. 
Further  issues  are  permitted  in  excess  of  this  reserve 
in  times  of  emergency,  but  they  are  penalized  by  a 
graduated  tax  which  ensures  their  prompt  retirement 
when  the  need  is  over.  Issues  are  made  in  response  to 
a  demand  evidenced  by  the  creation  of  commercial  paper 
and  are  retired  upon  liquidation  of  this  paper,  thus 
providing  a  maximum  of  elasticity. 

Other  improvements  were  made  which  enabled  the 
Federal  Reserve  System  to  be  of  much  greater  service 
to  the  business  world  than  the  national  banking  system 
could  be.  Among  these  were  the  development  of  trade 
acceptances  and  of  "  open-market  "  purchases;  the 
establishment  of  branch  banks  in  foreign  countries,  of 
wliich  there  were  70  by  July  1,  1919 ;  the  establishment 

136 


PAPER  MONEY  AND  BANK  CREDIT 

of  a  variable  discount  rate;  and  the  development  of 
"  commodity  paper"  whereby  banks  may  advance  loans 
on  staple  agricultural  products  properly  warehoused 
and  insured,  a  form  of  credit  which  saved  the  situation 
in  the  South  in  1915  when  England  put  cotton  on  the 
list  of  contraband. 

The  assistance  rendered  by  the  Federal  Reserve 
System  both  to  the  public  and  to  the  Treasury  during 
the  two  years  of  war  can  be  stated  in  briefest  fashion. 
The  period  of  two  and  one-half  years  between  its  organ- 
ization and  the  declaration  of  war  by  the  United  States 
was  one  of  development  of  the  Federal  Reserve  System 
to  a  point  of  efficiency  which  enabled  it  easily  to  assume 
and  carry  through  the  onerous  and  responsible  tasks 
of  war  finance.  The  banks  continued  to  grant  the 
accommodation  necessary  to  enable  business  to  meet  the 
new  and  often  untested  demands  upon  it.  In  accord- 
ance with  the  Government's  policy  of  conserving  so  far 
as  possible  the  capital  resources  of  the  country  for  pur- 
poses that  would  assist  in  winning  the  war,  the  banks 
were  urged  to  discourage  the  production  of  nonessentials 
and  to  limit  loans  for  such  purposes.  In  order  better  to 
carry  out  this  principle  the  Capital  Issues  Committee  of 
the  Federal  Reserve  Board  was  created  on  February  1, 
1918,  to  pass  upon  applications  for  the  issue  of  new 
securities.  Although  it  was  without  specific  legal 
authority,  it  was  able  to  effect  a  considerable  stoppage 
of  non-essential  security  issues.  By  the  War  Finance 
Corporation  Act  of  April  5,  1918,  its  functions  passed 
to  a  new  committee  of  the  same  name.^°  In  still  other 
ways  the  Federal  Reserve  Banks  rendered  valuable  serv- 

*"  For  a  description  of  the  operations  of  this  Committee  see,  in 
this  series,  VV.  F.  Willoughby,  Government  Organization  in  War 
Time  and  After. 

137 


WAR  COSTS  AND  THEIR  FINANCING 

ice  in  carrying  out  the  program  of  war  finance,  as  by 
supervising  foreign-exchange  transactions. 

The  work  of  tlie  hanlcs  as  fiscal  agents  of  tlie  Govern- 
ment can  best  be  illustrated  by  stating  results.  The 
Government's  policy  was  to  meet  current  expenditure 
by  placing  short-time  Treasury  certificates  of  indebted- 
ness, funding  these  later  into  long-term  bonds.  It  made 
the  Federal  Reserve  Banks  its  fiscal  agents  in  their 
respective  districts.  Certificates  were  offered  through 
the  Federal  Reserve  Banks  and  subscribed  by  all  bank- 
ing institutions  according  to  fixed  quotas,  and  the  credit 
placed  to  the  account  of  the  Government.  When  loans 
were  to  be  marketed,  each  reserve  bank  organized  loan 
committees,  with  interlacing  subcommittees  throughout 
its  district.  Loan  quotas  were  allotted  in  a  predeter- 
mined ratio  according  to  resources,  population,  etc. 
All  banks  received  applications,  accepted  payments,  dis- 
tributed bonds.  Sometimes  they  underwrote  their 
respective  quotas  and  remarketed  the  bonds  with  sub- 
scribers, holding  temporarily  many  bonds  sold  on  the 
instalment  plan.  The  Federal  Reserve  Board  also 
facilitated  placing  loans  by  adopting  the  rule  of  prefer- 
ential discounts  for  loans  made  by  member  banks  to  bor- 
rowers for  the  purpose  of  purchasing  bonds,  at  first  at 
314  per  cent.,  then  at  4  per  cent.,  and  for  the  Fourth 
Liberty  Loan  carrying  the  borrower  at  the  same  discount 
as  the  interest  of  the  bonds.  Still  later  member  banks 
became  the  agents  of  non-member  banks  for  the  redis- 
counting  of  such  loans  as  the  latter  made  to  their  cus- 
tomers to  purchase  war  bonds.  The  banks  rendered 
invaluable  service  not  merely  to  the  Government  by 
assisting  the  flotation  of  the  bond  issues,  but  also  to 
business  by  loaning  freely  on  war  paper. 

During  1917  the  reserve  banks  as  fiscal  agents 
138 


PAPER  MONEY  AND  BANK  CREDIT 

distributed  Treasury  certificates  to  the  amount  of 
$8,338,698,000.  During  the  same  year  as  fiscal  agents 
they  marlveted  two  Government  loans  totalling  $5,808,- 
000,000.  In  1918  they  distributed  under  a  definite  plan 
of  the  Treasury  Department  certificates  of  indebtedness 
totalling  about  $9,000,000,000.  In  July  the  Treasury 
submitted  a  plan  calling  for  the  absorption  of 
$6,000,000,000,  of  these  certificates  in  bi-weekly  lots  of 
$750,000,000  between  July  and  November.  In  anticipa- 
tion of  the  Third  Loan  the  banks  distributed  $3,000,000,- 
000,  and  in  anticipation  of  the  Fourth,  $4,518,000,000. 
During  1918  as  fiscal  agents  they  marketed  these  two  loans 
which  resulted  in  subscriptions  of  $11,000,000,000.  In 
these  various  ways  the  Federal  Reserve  Banks  per- 
formed services  for  the  national  fisc  which  were  of  incal- 
culable value,  and  carried  through  transactions  which 
the  old  national  banking  system  could  not  have  accom- 
plished. 

The  enormous  expansion  of  transactions  as  a  result  of 
war  financing  has  not  been  without  some  deleterious 
influences  upon  both  public  and  private  finance.  Of  these 
the  most  striking  and  far-reaching  in  its  effects  has  been 
the  inflation  both  of  note  issues  and  of  deposits.  Be- 
tween ]\Iarch  30,  1917,  a  week  before  the  entrance  of  the 
United  States  into  the  war,  and  December  27,  1918,  the 
increase  in  Federal  reserve  notes  was  $2,328,000,000, 
and  in  deposits,  $1,017,000,000.  On  the  side  of 
resources  there  was  an  increase  for  the  same  period  of 
$1,152,000,000  in  gold  and  $1,400,000,000  in  Avar  paper 
and  $502,000,000  in  commercial  discounts  and  purchase 
of  acceptances.  "  It  will  be  seen  that  after  making  due 
allowance  for  the  notes  which  have  been  exchanged  for 
gold,  the  net  expansion  in  note  issues  has  been  due 
'largely  to  the  discount  by  the  banks  of  paper  secured 

139 


WAR  COSTS  AND  THEIR  FINANCING 

by  war  obligations  of  the  Government.""  Not  merely 
were  the  banks  hampered  by  this  mass  of  undigested 
war  paper  in  their  portfolios,  amounting  to  about  eight 
per  cent,  of  the  first  four  Liberty  Loans/-  but  the  rates 
of  discount  were  fixed  with  regard  to  Treasury  require- 
ments rather  than  the  commercial  needs  of  the  country. 
The  real  inflation  took  place  through  the  expansion  of 
bank  deposits,  rather  than  through  an  enlargement  of 
note  issues.  In  so  far  as  the  Government  loan  policy 
during  the  war  promoted  this,  it  must  bear  its  share  of 
responsibility  for  the  inflation  which  occurred. 

One  of  the  curious  incidents  of  the  war  was  the  treat- 
ment of  gold.  Practically  every  country  except  England 
and  the  United  States  suspended  specie  payments  and 
thereby  legally  handed  over  the  gold  stock  to  the  safe- 
keeping of  the  great  central  banking  institutions.  Cam- 
paigns were  also  inaugurated  in  Germany,  France,  and 
Russia  to  induce  the  people  to  deposit  their  hoarded  gold 
in  the  banks,  so  that  these  central  reserves  might  be 
strengthened.  Between  two  and  three  billion  dollars  in 
gold  were  added  to  the  holdings  of  the  great  banks  of 
the  world  during  the  period  of  the  war,  practically  all 
of  which  was  withdrawn  from  circulation.  Indeed,  it 
may  be  said  that  more  gold  was  mined  out  of  the  pockets 
of  the  people  during  this  period  than  out  of  the  earth. 
The  Federal  Reserve  Banks  of  the  United  States,  holding 

^^  Fifth  Annual  Report  of  the  Federal  Reserve  Board,  1919, 
p.  17.  The  net  increase  in  currency  was  much  less  than  the 
issue  of  Federal  reserve  notes,  since  gold  and  considerable  silver 
were  withdrawn  from  circulation.  This  is  reflected  in  the 
increase    in    the   gold   reserves. 

^^  It  may  be  estimated,  upon  the  basis  of  holdings  by  member 
banks  of  the  Federal  Reserve  Svstem,  that  the  banks  of  the  coun- 
try held  on  July  1,  1919,  between  $6,000,000,000,  and 
$6,500,000,000  of  war  paper  as  security  and  collateral. 

140 


PAPER  MONEY  AND  BANK  CREDIT 

about  one-third  of  all  the  gold,  possess  the  greatest  store 
ever  brought  together  in  the  history  of  the  world. 

Practically  i?very  country  placed  an  embargo  upon 
gold.  In  England  and  the  United  States,  which  nomi- 
nally had  not  suspended  specie  payments,  it  was 
made  very  difficult  for  the  ordinary  citizen  to  obtain 
gold  even  at  the  officially  designated  redemption 
agencies.  There  was  a  general  tacit  agreement  that  it 
was  unpatriotic  to  ask  for  the  redemption  of  notes  in 
gold.  Foreign  exchange  came  to  be  regulated,  not  by 
the  shipment  of  gold,  but  by  the  granting  of  credit  or 
the  placing  of  loans,  and  so  skillfully  was  this  done  that 
in  spite  of  the  extraordinary  dislocation  of  trade  the 
rates  between  the  United  States  and  England,  for 
example,  were  effectively  "  pegged  "  or  stabilized. 

In  spite  of  the  enormous  stocks  of  gold  which  had 
flowed  into  the  United  States  during  the  war  (the 
excess  of  gold  imports  over  exports  from  August  1,  1914, 
to  December  10,  1018,  was  $1,071,669,000),  the  Treasury 
Department  would  not  permit  the  free  export  of  gold 
even  to  those  countries  with  which  the  trade  balance  of 
the  United  States  was  adverse.  It  endeavored  rather 
to  correct  the  unfavorable  rate  of  exchange  with  such 
countries  by  encouraging  the  export  of  commodities  of 
high  value  and  small  bulk;  thus,  phonographs,  type- 
writers, and  similar  articles  were  shipped  to  South 
American  countries  rather  than  gold,  in  spite  of  the 
fact  that  such  commodities  diverted  domestic  labor  from 
war  industries  and  could  in  no  event  have  been  shipped 
in  sufficient  quantities  to  have  influenced  materially  the 
rate  of  exchange.  It  was  possible  that  exported  gold 
might  come  into  the  possession  of  the  enemy,  and  it 
was  consequently  deemed  advisable  for  the  Government 
to   control   its   movement.      On    September   7,   1917,    a 

111 


WAR  COSTS  AND  THEIR  FINANCING 

Presidential  proclamation  was  issued  forbidding  the 
export  of  all  bullion,  coin,  or  currency  except  in  accord- 
ance with  regulations  to  be  prescribed  by  the  Secretary 
of  the  Treasury.  The  administration  of  these  regula- 
tions was  placed  in  the  hands  of  the  Federal  Reserve 
Board,  which  established  for  this  purpose  a  Division 
of  Foreign  Exchange. 

Under  the  operation  of  these  regulations  the  export 
of  gold  was  permitted  only  when  the  foreign-exchange 
situation  imperatively  demanded  it,^^  and  even  when 
such  cases  arose  efforts  were  made  to  avoid  it.  Arrange- 
ments were  made  with  Argentina  by  which  funds  were 
to  be  deposited  in  the  Federal  Reserve  Bank  of  New 
York  as  a  basis  for  furnishing  exchange  on  that  country, 
and  the  United  States  Government  agreed  to  ship  gold 
at  the  end  of  the  war  if  the  situation  then  called  for  it. 
Similar  agreements  were  made  with  Bolivia,  Peru,  and 
Uruguay,  and  different  arrangements,  but  with  a  like 
result,  were  made  with  India,  Spain  and  Switzerland. 
As  a  result  the  discount  on  the  dollar  in  those  countries 
was  reduced  or  wiped  out,  and  gold  exports  fell  off. 
The  embargo  on  gold  was  finally  removed  on  June  9, 
1919.  The  table  opposite  shows  the  imports  and  exports 
of  gold  of  the  United  States  during  the  war. 

In  addition  to  the  movement  of  gold  there  were  large 
net  exports  of  silver,  chiefly  to  India.  The  net  exports 
were  as  follows:  $43,226,368  in  the  fiscal  year  1917; 
$68,853,246  in  1918 ;  and  $222,349,284  in  1919 ;  a  total 
of  $334,478,898. 

Back  of  this  universal  policy  of  retention  by  each 
country  of  its  stock  of  gold  and  unwillingness  to  permit 

"The  exports  of  ^oM  fell  from  202.5  million  dollars  for  the 
first  six  months  of  1917  to  21.5  millions  for  the  corresponding 
period  of  1918, 

142 


PAPER  MONEY  AND  BANK  CREDIT 


United  States  Gold  Imports  and  Exports,  1914-1919 
(7/1  thousands) 


Period 

Imports 

"Exports 

Excess  of 
imports 

Aug.  1-Dec.  31,  1914 

Jan.   1-Dec.  31,  1915 

Jan.   1-Deo.  31,  1916 

Jan.   1-Dec.  31,  1917 

Jan.   1-Dec.  31,  1918 

Jan.   1-June  30,  1919 

$23,253 
451,955 
685,745 
553,713 
61,950 
50,465 

.i^l04,972 

31,426 

155,793 

372,171 

43,848 
97,008 

*— $81,719 

429,529 

529,952 

181,542 

21,102 

*— 46,543 

Total 

•SI,  827, 081 

$802,218 

SI, 024, 863 

*  Excess  of  exports  over  imports. 

it  to  be  exported  lay  the  fear  that  if  it  were  let  go  it 
might  get  into  the  hands  of  the  enemy.  At  the  ])asis 
lay  the  conviction  that  large  gold  reser\^s  were  essential 
to  the  support  of  the  credit  organization  upon  which 
the  finances  of  all  the  belligerents  were  dependent.  Even 
though  specie  payments  were  suspended  and  existing 
issues  of  bank  notes  or  paper  money  were  inconvertible, 
the  psychological  reaction  of  large  gold  resources  upon 
the  public  mind  undoubtedly  inspired  the  accumulation 
of  the  metal.  Perhaps  even  more  than  this  the  necessity 
of  redeeming  ultimately  the  large  i.ssues  of  fiduciary 
money  made  the  Governments  unwilling  to  surrender 
any  of  their  gold,  even  though  in  the  interval  it  was 
maintained  merely  as  an  idle  hoard.  jNIanifestly  the 
nation  with,  the  largest  ratio  of  gold  to  paper  would  be 
in  the  bpst  position  to  resume  specie  payments. 

The  logical  inference  from  the  experiences  in  the  ship- 
ment of  gold  and  the  stabilization  of  exchange  during 
the  war  was  drawn  by  the  Treasury  Department  as 
early  as  1916.  In  that  year  a  convention  was  framed 
providing  for  the  establishment  of  an  International  Gold 
Clearance  Fund,  based  upon  the  conclusions  of  the  meet- 

143 


WAR  COSTS  AND  THEIR  FINANCING 

ing  of  the  International  High  Commission  held  in 
Buenos  Aires  in  April  of  that  year."  There  was  pro- 
posed the  establishment  of  an  International  Gold  Clear- 
ance Fund,  under  a  joint  or  multiple  international 
guaranty,  to  facilitate  financial  transactions  between 
nations  without  actual  shipment  of  gold,  similar  to  the 
machinery  maintained  by  the  Federal  Reserve  Board  to 
settle  balances  between  banks  within  the  United  States. 
The  Federal  Reserve  Board  has  expressed  its  willing- 
ness to  assist  in  the  inauguration  of  such  a  system,  which 
it  thought  should  be  confined  in  the  beginning  to  the 
United  States  and  the  Entente  Allies  and  a  few  of  the 
leading  neutral  nations,  but  wliich  might  eventually 
admit  all  civilized  countries/^ 

One  of  the  interesting  and  quite  unexpected  results 
of  the  changes  wrought  by  tlie  war  has  been  a  fall  in 
the  price  of  gold  during  the  past  five  years.  This  was 
not  caused  by  overproduction,  for  the  production  of  gold 
actually  declined  during  the  war.  The  output  in  the 
United  States  fell  off  from  $100,000,000  in  1915  to 
$84,000,000  in  1917,  many  of  the  smaller  mines  being 
closed  on  account  of  rising  wages  and  increased  cost  of 
production.     Gold  shared  the  fate  of  paper  currency,  to 

"  The  Convention  Providing  for  the  Establishment  of  an  Inter- 
national Gold  Clearance  Fund.  Published  liy  the  Central  Execu- 
tive Council  of  the  International  High  Commission  (Washington, 
1919). 

^^  The  successful  operation  of  the  Gold  Settlement  Fund  in  the 
United  States  has  suggested  the  possibilities  of  avoiding  ship- 
ments of  gold  from  one  country  to  another  in  settlement  of  bal- 
ances arising  out  of  ordinary  commercial  transactions,  and  the 
Board  is  ready  if  authorized  to  do  so,  to  undertake  negotiations 
looking  to  the  establishment  of  an  International  Gold  Exchange 
Fund,  or  to  assist  in  any  way  in  its  power  in  negotiations  which 
may  be  begun  by  a  Government  department  looking  to  that  end. 
.  .  .  The  saving  of  loss  and  expense  incident  to  abrasion  and 
transportation  charges,  and  interest  on  gold  transferred,  will 
be  enormous,  and  the  advantage  to  the  commerce  of  the  world 
will  be  incalculable. —  Report,  1918,  p.  35. 

144 


PAPER  MONEY  AND  BANK  CREDIT 

which  it  was  tied  by  a  fixed  mint  price  of  $20.67  per 
ounce.  The  fall  in  the  case  of  gold  to  half  its  former 
purchasing  power  was  caused  by  the  general  rise  in 
prices  of  commodities  and  wages  of  labor  which  resulted 
from  the  increase  in  the  amount  of  the  circulating 
media  in  forms  other  than  gold,  as  well  as  from 
scarcity.  The  situation  thus  created  led  to  a  demand 
on  the  part  of  gold  producers  for  Government  assistance 
by  means  of  a  bounty  or  some  other  form  of  aid.  No 
action,  however,  was  taken  towards  this  end.  Although 
it  is  recognized  that  the  gold-jiroducing  interests  have 
suffered  severely  from  the  unprecedented  fall  in  the 
value  of  gold,  it  must  be  regarded  as  fortunate  that 
no  artificial  stimulation  has  been  given  to  its  production. 
Increased  gold  production  would  simply  have  caused  a 
still  greater  rise  in  prices,  eitlier  by  entering  directly 
into  circulation  or  by  being  made  the  basis  for  a  further 
expansion  of  credit. 

The  price  of  silver,  on  the  other  hand,  has  risen  in 
common  with  that  of  other  commodities.  This  fact  has 
already  caused  a  renewal  of  the  demand,  of  which  little 
had  been  heard  for  twenty  years,  for  bimetallism.  It  is 
not  unlikely  that  bimetallism  will  be  urged  on  the  ground 
that  the  stock  of  gold  constitutes  an  inadequate  basis 
for  the  existing  credit  superstructure  and  that  the 
remonetization  of  silver  would  strengthen  the  system 
But  the  arguments  that  previously  caused  the  rejection 
of  bimetallism  and  the  adoption  of  the  gold  standard 
apply  now  as  strongly  as  ever.  The  solution  of  existing 
currency  and  banking  problems  must  be  sought  along 
lines  other  than  those  proposed  by  the  bimetallists. 


145 


CHAPTER  VI 

LOANS  IN  EUROPE 

Ceneral  characteristics  —  British  war  loans  —  Use  of  loans  in 
France,  Russia,  and  Italy  —  The  German  theory  of  war 
finance  —  German  banks  and  loan  bureaus  —  Loans  in 
Austria-Hungary,  Bulgaria,  and  Turkey. 

In  any  financial  study  of  tlie  World  War  the  subject 
of  loans  assumes  a  preponderant  importance,  for  over 
four-fifths  of  the  war  expenditures  were  met  by  bor- 
rowing. Not  only  did  this  method  of  raising  funds  rank 
first  by  reason  of  its  magnitude,  but  also  by  reason  of 
its  universality.  Everywhere  the  method  of  borrowing 
was  used  as  a  means  of  securing  the  necessary  money. 
Althougli  each  country  financed  its  war  needs  according 
to  its  power  and  its  national  customs,  which  differed 
greatly  in  some  respects  among  the  different  countries, 
these  often  underwent  profound  changes  during  the 
war.  Certain  distinct  features  and  tendencies  developed 
which  were  more  or  less  characteristic  of  all  the  belliger- 
ent countries  and  which  may  be  briefly  summarized. 

(1)  Magnitude. —  Whatever  else  may  be  said  in 
praise  or  blame  of  the  financing  of  the  World  War,  there 
can  be  no  question  of  its  preeminence  with  respect  to  the 
magnitude  of  the  war  loans.  Indeed,  it  has  been  said 
that  the  costs  of  the  late  war  exceeded  those  of  all  other 
European  M^ars  together  since  the  beginning  of  the 
Christian  era.  Not  only  was  the  aggregate  enormous, 
but  single  issues  were  brought  out  and  successfully 
floated    which    a    few    years    earlier    would    have    been 

146 


LOANS  IN  EUROPE 

deemed  impossible  by  the  best  informed  financiers,  lu 
point  of  size  the  first  place  is  held  by  the  Fourth  Liberty 
Loan  of  the  United  States,  which  reached  a  total  of 
$G,993,000,000,  subscribed  in  three  weeks;  England 
ranks  second  with  her  third  loan,  amounting  to 
$4,811,000,000,  although  the  fourth,  which  took  the  form 
of  continuous  borrowing  over  a  period  of  almost  15 
montlis,  reached  a  total  of  $8,461,000,000.  Tht-  largest 
French  issue  was  the  fourth,  amounting  to  $6,000,000,- 
000  nominally  and  representing  a  return  to  the  Treasury 
of  $4,250,000,000.  In  Germany  the  largest  loan,  the 
eighth,  amounted  to  $3,520,000,000.  In  other  countries 
the  loans  were  considerably  smaller  in  amount. 

(2)  Limitation  of  Amount. —  Although  the  ministers 
of  finance  were  always  anxious  to  secure  as  large  returns 
as  possible  from  offerings,  they  sometimes  manifested 
praiseworthy  self-restraint  by  imposing  in  particular 
loans  a  fixed  limit  upon  the  amount  that  would  be 
accepted  by  the  Treasury.  In  the  United  States  sub- 
scriptions to  the  First  and  Fifth  Liberty  loans  w'ere 
limited  to  the  amounts  originally  asked,  while  to  the 
Second  Loan  oversubscriptions  of  50  per  cent,  only 
were  accepted.  Canada  limited  the  amount  on  all  loans 
except  the  last.  France  and  Italy  limited  the  amounts 
accepted  on  their  first  loans.  In  all  other  cases  the  full 
amounts  subscribed  were  taken  by  the  Treasury. 

A  striking  characteristic  was  tlw  fairly  steady  increase 
in  the  amounts  of  the  loans  in  all  the  belligerent  coun- 
tries. This  was  due  in  part  to  the  growing  war  spirit 
and  the  determination  to  carry  the  struggle  through 
to  a  victorious  finish.  But  more  responsible  for  the 
increase  in  the  successive  loans  was  the  gi'owing  cost  of 
the  war^  which  led  to  unheard-of  demands  upon  the 

147 


WAR  COSTS  AND  THEIR  FINANCING 

peoples.  These  increasing  costs  in  turn  were  caused 
partly  by  the  scarcity  of  needed  supplies,  but  primarily 
by  the  inflation  of  the  currency  and  the  steady  deprecia- 
tion of  the  monetary  unit,  a  phenomenon  world-wide  in 
its  influence.  Measured  in  purchasing  power,  the  later 
loans  did  not  represent  an  increase  at  all  comparable 
with  the  nominal  amounts  subscribed. 

(3)  Term. —  A  general  policy  of  war  borrowing 
seemed  to  have  been  developed  by  common  consent  in 
all  the  belligerent  countries.  Advances  from  the  central 
banking  institutions  and  issues  of  short-term  Treasury 
bills  were  first  made  use  of,  and  these  were  later  funded 
by  issues  of  long-term  bonds.  Advances  from  the  banks 
were  used  to  a  large  extent  in  France,  Russia,  Italy,  and 
Austria-Hungary,  countries  in  which  a  discount  market 
and  the  practice  of  deposit  banking  were  not  well 
developed.  The  issue  of  short-term  Treasury  bills  in 
anticipation  of  loans  characterized  the  financial  policy 
of  the  United  States,  Great  Britain,  and  Germany,  and 
France,  too,  made  large  use  of  short  term  hons.  In  the 
first-named  group  of  countries  the  advances  from  the 
banks  have  been  taken  up  only  to  a  slight  extent  by 
the  issue  of  long-term  obligations,  and  they  remain  still  a 
charge  against  the  State.  In  the  second  group  of  coun- 
tries the  Treasury  bills  have  been  or  are  in  process  of 
being  funded  (except  in  the  case  of  Germany,  where 
an  enormous  floating  debt,  estimated  at  72,000,000,000 
marks,  exists)  into  long-term  loans,  either  at  regular 
intervals,  as  in  Germany,  or  at  irregular  intervals  deter- 
mined by  the  state  of  the  market,  as  in  Great  Britain 
and  France.  In  all  the  European  belligerent  countries 
the  war  left  a  considerable  floating  debt  which  must  be 
funded  by  further  issues  of  long-term  bonds. 

148 


LOANS  IN  EUROPE 

(4)  Maturing  or  Perpeiual  Bonds. —  The  type  oi 
bond  issued  in  the  different  countries  was  determined 
largely  by  pre-war  habits  and  predilections  of  the 
people.  As  between  terminable  or  perpetual  loans  the 
former  was  much  the  more  preferred.  In  France,  Italy, 
Germany,  and  Hungary  the  rente  type  of  loan  was  used, 
in  which  an  optional  redemption  date  was  fixed  by  the 
Government  but  no  date  of  maturity  was  named  in  the 
bonds.  The  issues  of  all  the  other  countries,  and  some 
of  those  of  the  countries  just  named,  took  the  form  of 
terminable  bonds.  A  large  num])er  of  these  contained 
the  optional  feature,  according  to  which  the  Government 
fixed  an  optional  redemption  date  within  a  compara- 
tively short  period  and  a  due  date  at  which  the  bonds 
matured  at  a  considerably  later  date.  Thus,  the  first 
British  loan  was  made  redeemable  in  10  years  and  pay- 
able in  13 ;  the  first  Russian  loan  was  a  10-40  year  bond ; 
the  first  Italian  loan  was  a  10-25  year  bond.  On  the 
other  hand,  all  the  war  bonds  of  Canada  and  Australia 
were  straight-term  bonds  running  from  five  to  20  years. 
No  country  made  use  of  annuities. 

(5)  Period  of  Subscription. —  As  the  costs  of  the  war 
and  the  consequent  size  of  the  war  loans  increased,  it 
became  necessary  in  most  instances  to  prolong  the  period 
of  subscription.  "Whereas  in  the  earlier  loans  a  week 
might  have  sufficed  to  obtain  the  sums  needed,  toward 
the  end  of  the  war  the  subscription  periods  would  some- 
times be  left  open  for  two  or  three  months.  Unique  in 
this  respect  was  the  continuous  loan  opened  by  Great 
Britain  on  October  1,  1917,  and  not  finally  closed  until 
January  18,  1919,  thus  covering  a  period  of  nearly  15 
months.  In  those  countries  in  which  war  savings  certifi- 
cates were  sold  an  exception  might  also  be  made  to  cover 

149 


WAR  COSTS  AND  THEIR  FINANCING 

them,  for  the  policy  of  continuous  sale  was  adopted  for 
these  also.  In  certain  instances  in  v/hich  the  amount  of 
the  loan  was  fixed  and  the  subscriptions  did  not  equal 
the  amount  in  the  period  originally  set,  the  time  was 
extended  until  the  requisite  sum  was  forthcoming. 

(6)  Date  of  Issue. —  The  fixing  of  the  date  of  issue 
was  of  secondary  importance.  Except  in  the  case  of 
Germany  dates  of  issue  seem  to  have  been  determined 
largely  by  convenience,  if  not  by  chance.  Germany's 
loans  were  issued  at  six-months  intervals,  evidently 
according  to  a  prearranged  schedule,  though  the  choice 
of  a  first  date  was  probably  determined  more  or  less  by 
the  fortuitous  date  of  the  outbreak  of  the  war.  Once 
the  dates  of  Germany's  loans  were  fixed,  those  of 
Austria-Hungary  and  of  her  lesser  allies  were  deter- 
mined in  relation  thereto,  in  order  that  there  might  be 
no  competition  among  them  in  the  loan  market.  The 
same  thing  was  true  of  the  Entente  Allies.  A  proposal 
for  a  joint  loan  on  the  part  of  the  Great  Powers  was 
rejected  as  impracticable/  but  an  understanding  was 
reached  by  which  the  European  Powers,  although  bor- 
rowing independently,  consulted  together  so  that  they 
did  not  come  upon  the  money  market  simultaneously 
and  thus  compete  against  each  other  for  capital. 

(7)  Rate  of  Interest. —  The  rate  of  interest  varied 
from  314  per  cent,  for  the  first  British  loan  and  the 
First  Liberty  Loan  of  the  United  States  to  six  per  cent, 
in  the  case  of  the  Hungarian  loans.  There  was  every- 
where a  gradual,  and  in  some  cases  a  considerable, 
increase  in  the  rate  of  interest  that  had  to  be  offered  to 
attract  the  necessary  capital,    even   in   those   countries 

* "  Finance  of  the  War,"  Spectator,  February  20,  1915,  p.  254. 

150 


LOANS  IN  EUROPE 

which  started  with  the  lowest  rates.  An  apparent  excep- 
tion exists  in  the  ease  of  Germany  and  Austria-Hungary, 
where  the  rate  of  interest  remained  unchanged  at  five 
or  six  per  cent,  throughout  the  war.  But  this  exception 
is  more  apparent  than  real,  for  considerable  compulsion 
was  used  in  the  flotation  of  these  bonds,  especially  of  the 
later  issues,  and  contractors  and  banks  were  forced  to 
accept  them.  Moreover,  the  appearance  of  a  uniform 
rate  of  interest  was  wholly  artificial  in  the  case  of  Ger- 
many, for  the  later  loans  had  attached  to  them  valuable 
premiums. 

According  to  a  computation  published  a  few  years 
liefore  the  war,  the  rate  of  Government  loans  for  the 
leading  powers  of  Europe  ranged  from  a  little  und'or 
three  per  cent,  to  somewhat  OA^er  five  per  cent.  The 
following  table  indicates  the  credit  of  the  different 
European  nations  before  the  war:^ 

Pre-War  Credit  op  the  Leading  European  Nations 


Countr}'^ 

Name  of  Loan 

Average 
price, 
1907 

Value 
reduced  to 
3  per  cent. 

base 

Real 
rate  of 
interest 

Great  Britain 

France 

Germany. . .  . 

Austria 

Russia 

Italy 

2|  per  cent,  consol. 

3  per  cent,  rente .  .  . 
3|  per  cent,  rente.  . 

4  per  cent.  bond. . . 

5  per  cent.  bond. . 
3j   per  cent,   bond 

free  of  income  tax 

94.1 
94.8 
94.6 
97.9 
75.2 

102.4 

100.6 
94.4 
81.1 
69.9 
56.4 

81.1 

2.9 
3.1 
3.7 
4.2 
5.3 

3.7 

Tt  is  evident  from  this  showing  that  the  credit  of  the 


-  F.  W.  Hirst,  "  The  Credit  of  Nations."  in  Report  of  National 
Monetary  Commission    (1910),  xx,  pp.  6-8. 


151 


WAR  COSTS  AND  THEIR  FINANCING 

different  European  nations  was  variously  rated  before 
the  war.  These  differences  persisted  and  were  further 
magnified  during  the  course  of  the  war.  Moreover,  the 
credit  of  all  the  nations  suffered  as  a  result  of  their 
excessive  borrowing.  The  rise  in  the  rates  of  interest 
would  undoubtedly  have  been  much  greater  had  the 
appeal  been  made  only  to  purely  commercial  motives, 
but  as  a  matter  of  fact  the  appeal  to  the  patriotism  of 
the  peoples  of  the  belligerent  countries  was  sufficiently 
strong  to  secure  the  needed  funds  at  rates  which,  con- 
sidering the  investment  features  alone,  were  remarkably 
moderate. 

(8)  Price  of  Issue. —  From  the  standpoint  of  the  pur- 
chaser the  nominal  rate  of  interest  was  of  less  moment 
than  the  real  yield,  and  this  was  a  function  of  the  two 
factors  of  interest  rate  and  issue  price.  In  this  latter 
particular  there  was  considerable  diversitj^  The  United 
States,  Australia,  and  New  Zealand  sold  all  their  l)onds 
at  par ;  Great  Britain  issued  all  of  hers  except  the  third 
(in  part)  at  par;  Canada  and  India  issued  about  half 
of  theirs  at  par.  The  Continental  European  nations 
without  exception  followed  the  plan  of  issue  at  a  dis- 
count, usually  at  only  a  slight  concession  of  from  two 
to  seven  or  eight  points.  The  only  departure  from 
this  rule  is  found  in  the  case  of  France,  which  issued  the 
first  two  loans  at  about  88,  the  third  at  68,  and  the 
fourth  at  60.  This  was  in  conformity  with  French 
financial  practice,  which  prefers  a  low  rate  of  interest 
on  a  bond  sold  at  a  discount  to  a  bond  sold  at  par 
bearing  a  high  rate  of  interest.  It  is  scarcely  necessary 
to  point  out  that  such  a  method  makes  for  a  per- 
petual debt,  as  it  practically  denies  the  possibility  of 
redemption. 

152 


LOANS  IN  EUROPE 

(9)  Conversion  Prii'ilcgcs. —  lu  order  to,  make  the 
bonds  more  attractive  they  often  carried  the  provision 
of  convertibility  into  subsequent  issues  bearing  liigher 
rates  of  interest  or  more  advantageous  terms  of  redemp- 
tion. This  provision  was  made  vs^itli  the  double  purpose 
of  strengthening  public  credit  and  of  preventing  dis- 
crimination against  purchasers  of  earlier  issues,  and  also 
for  the  purpose  of  amalgamating  the  pre-v\^ar  debt  and 
the  war  debt.  In  France  and  in  England  practically  the 
whole  of  the  pre-war  debt  was  successfully  converted 
in  the  midst  of  the  issue  of  war  loans.  As  a  result  of 
granting  conversion  privileges  to  holders  of  earlier 
issues,  however,  the  advantage  derived  from  floating 
these  loans  at  a  low  rate  of  interest  was  lost. 

(10)  Freedom  from  Taxation. —  It  may  be  said  that 
outside  of  the  United  States,  Great  Britain,  and  the 
British  colonies  the  loans  were  issued  free  of  taxation, 
with  respect  to  either  principal  or  interest  or  both.  The 
English-speaking  countries  experimented  with  both 
kinds  and  fixed  unhesitatingly  upon  the  issues  subject 
to  tax.  The  United  States  was  the  only  country  that 
granted  tax  exemption  for  small  blocks  for  a  certain 
length  of  time.  The  variety  and  extent  of  the  exemp- 
tions granted  in  the  different  countries  make  it  difficult 
to  compare  the  real  rates  of  interest  paid,  in  addition 
to  which  the  diversity  in  the  rates  of  taxation  in  the 
different  countries  adds  another  element  of  variation. 

(11)  Collateral  Privileges. —  Other  features  designed 
to  make  the  bonds  attractive  to  investors  were  added  in 
most  of  the  borrowing  countries.  For  example,  the  right 
would  frequently  be  giwn  to  tender  the  bonds  in  pay- 
ment of  customs  duties,  or  excise  duties,  or  estate  taxes, 

153 


WAR  COSTS  AND  THEIR  FINANCING 

or  Avar-profits  taxes,  or  as  security  in  any  judicial  pro- 
ceeding in  which  security  was  required,  or  in  payments 
on  Government  contracts.  In  some  of  the  countries  the 
banks  were  either  authorized  or  were  under  compulsion 
to  loan  on  war  bonds  as  collateral  at  unusually  favorable 
rates  of  interest. 

(12)  Bond-Purchase  Funds. —  Several  of  the  coun- 
tries, notably  the  United  States,  Great  Britain,  and 
France,  established  funds  which  were  to  be  devoted  to 
the  purchase  of  bonds  in  the  open  market  with  a  view 
to  sustaining  their  price.  In  Germany  the  same  end 
was  achieved  by  requiring  the  Reichsbank  and  other 
banks  to  repurchase  the  war  bonds  at  the  issue  price 
from  the  original  subscriber  in  case  of  dire  need  of  the 
owner.  So  frequent  and  so  large  were  the  issues  of 
bonds,  however,  that  it  is  doubtful  whether  the  creation 
of  these  funds  exercised  any  potent  influence  in  main- 
taining the  price  of  the  bonds  on  the  market.  There 
was  an  enormous  quantity  of  undigested  securities  the 
presence  of  which  exercised  a   depressing  influence. 

(13)  Internal  or  Foreign  Loans. —  Because  of  the  fact 
that  practically  every  civilized  country  in  the  world, 
belligerent  or  neutral,  was  forced  into  the  loan  market 
during  the  war,  there  was  practically  no  free  market 
for  the  loans  of  the  belligerents.  The  only  important 
exception  was  the  United  States,  where  foreign  loans 
to  the  amount  of  $3,000,000,000  were  placed  with 
bankers,  corporations,  or  private  individuals  in  the  two 
and  one-half  years  folloM'ing  the  outbreak  of  the  war  in 
1914.  Each  nation  consequently  was  forced  to  rely  upon 
its  own  citizens  to  supply  the  Government  Avath  capital. 
The   long-term   bonds   were   placed   almost   exclusively 

154 


LOANS  IN  EUROPE 

as  internal  loans  in  the  country  issuing  tliem.  It  was 
possible  to  place  in  foreign  markets  on  any  considerablt 
scale  only  short  term  Treasury  securities.  In  some  cases 
these  were  absorbed  by  private  investors,  but  for  the 
most  part  they  were  taken  by  allied  Governments  as 
evidence  of  the  indebtedness  created  by  the  purchase 
of  war  supplies  and  foodstuffs  in  the  selling  country. 
Thus,  the  Governments  of  the  United  States,  Great 
Britain,  France,  and,  to  a  slight  extent,  Japan,  on  the 
one  side,  and  Germany,  on  the  other,  made  advances  to 
their  allies;  in  fact,  it  may  be  said  that  these  countries 
financed  almost  wholly  the  war  operations  of  the  other 
nations  with  the  exception  of  Russia  and  Italy.  The 
last  two,  though  receiving  substantial  financial  assistance 
from  their  stronger  allies,  still  raised  the  major  part 
of  their  own  funds. 

(14)  MetJiods  of  Suhscriptioji  and  Payment. —  In  the 
endeavor  to  secure  large  and  general  subscriptions  every 
effort  was  made  to  facilitate  subscription  to  the  bonds 
and  to  render  payment  easy.  Subscriptions  were 
received  not  only  at  the  Treasury  of  the  issuing  country, 
but  by  any  bank  or  post  office,  and  in  some  cases  special 
selling  agencies  were  established.  Payment  was  very 
generally  permitted  on  the  instalment  plan,  and  this  was 
made  still  easier  for  persons  of  small  means  by  the 
acceptance  at  the  banks,  often  as  a  result  of  legislation, 
of  war  bonds  as  security  for  loans  at  rates  of  interest 
equal  to  or  only  slightly  higher  than  the  rates  borne 
by  the  war  bonds  themselves.  Germany  went  furthest 
in  this  direction  and  established  the  war  loan  offices 
already  described,  w^hich  were  authorized  to  loan  money 
on  practically  any  merchantable  commodities  for  the 
purpose  of  financing  the  war  loans. 

155 


WAR  COSTS  AND  THEIR  FINANCING 

(15)  Low  Denomination  of  Bonds. —  It  may  be  said 
without  fear  of  contradiction  that  never  before  in  the 
history  of  Government  borrowing  have  Government 
loans  been  so  widely  distributed.  This  was  due  in  a  large 
measure  to  the  general  appeal  to  patriotism  in  all  the 
belligerent  countries  and  to  the  loyal  response  on  the 
part  of  the  people,  but  partly  responsible  also  was  the 
fact  that  the  bonds  were  put  out  in  low  denominations 
v/hich  brought  them  within  the  reach  of  even  the 
humblest  buyer.  The  lowest  denomination  in  any  of  the 
countries  was  25  cents,  which  was  the  price  of  the  thrift 
stamps  in  the  United  States  and  Canada  and  the  war 
savings  stamps  in  Great  Britain.  These,  however,  did 
not  bear  interest  but  could  be  exchanged  for  interest- 
bearing  war  savings  certificates,  the  lowest  denomination 
of  which  was  $5  in  eacli  of  the  countries  named.  In 
bonds  the  lowest  denominations  were  those  issued  in 
Hungary  ($10)  ;  France,  Italy,  and  Austria  ($20)  ; 
Russia  and  Germany  ($25)  ;  and  the  United  States  and 
Canada  ($50).  In  Great  Britain  the  smallest  denomina- 
tion of  war  bond  was  $250,  but  inscribed  stock  or  instal- 
ment allotments  were  issued  for  small  sums  w^hich  might 
be  retained  until  the  bonds  were  fully  paid  for  or 
exchanged  for  scrip  certificates  to  bearer.  As  a  result 
of  these  metliods  the  loans  were  widely  distributed  and 
were  in  the  truest  sense  popular. 

(16)  Distribution. —  The  number  of  subscribers  in 
every  country  in  which  figures  on  the  subject  were  pub- 
lished was  not  only  large,  but  showed  a  very  general 
increase  from  one  issue  to  the  next.  In  the  countries 
for  which  these  statistics  were  published  (and  we  may 
assume  that  the  lack  of  information  from  the  other 
countries  indicates  that  the  contrary  was  probably  the 

156 


LOANS  IN  EUROPE 

case  there)  a  progressive  increase  in  the  number  of 
subscribers  was  observable.  In  placing  tbe  earlier  loans 
foreign  Governments  resorted,  as  was  their  wont,  to 
bank  consortiums  or  large  corporations.  It  soon  became 
evident,  however,  that  the  war  was  not  to  end  as 
speedily  as  had  at  first  been  anticipated,  and  conse- 
quently plans  were  devised  in  all  the  countries  to  attract 
the  small  investors.  Publicity  campaigns,  well  organized 
drives,  social  pressure  which  amounted  practically  to 
compulsion  were  all  made  use  of  to  secure  a  general 
distribution  of  the  bonds.  Taking  the  largest  number 
of  subscribers  for  any  one  loan  in  each  country,  the 
results  were  approximately  as  follows:  United  States, 
21,000,000 ;  Great  Britain,  5,000,000  f  France,  7,000,000 ; 
Italy,  490,000;  Canada,  1,000,000;  Austrialia,  220,000; 
Germany,  7,000,000.  No  statistics  on  this  point  were 
published  in  Russia,  New  Zealand,  India,  or  Hungary. 
Austria  announced  the  number  of  subscribers  only  in 
the  case  of  the  sixth  war  loan,  when  the  figure  was  given 
as  290,000. 

It  is,  of  course,  unlikely  that  the  distribution  of  the 
bonds  is  final,  and  there  is  no  way  of  determining  the 
extent  to  which  the  original  subscribers  have  sold  their 
holdings.  This  would  vary  in  different  countries  accord- 
ing to  national  characteristics  and  habits.  It  may  be 
concluded,  however,  that  a  remarkably  wide  distribution 
of  the  war  loans  has  been  effected,  and  it  may  be 
expected  that  this  fact  will  be  an  influential  factor  in 
preventing  the  repudiation  of  the  war  debt  in  any  of 

^ "  In  1914  the  British  debt  was  concentrated  in  the  hands  of 
345,100  holders;  at  the  present  time  it  is  divided  amonij  more 
than  16,750.000  large  and  small  holders,  of  whom  2.228.300  siilv 
scribed  through  the  Bank  of  England  to  the  war  loans,  4,000,000 
subscribed  through  the  post  office,  and  more  than  10,500.000 
possessed  war  savings  certificates."  Federal  Reserve  Bulletin, 
November,   1918,  p.   1065. 

157 


WAR  COSTS  AND  THEIR  FINANCING 

the  countries,  the  present  action  of  Russia  to  the  con- 
trary notwithstanding.  Large  amounts  of  the  war  loans 
were  taken  of  necessity  by  the  banks,  especially  the  large 
central  institutions.  The  portfolios  of  the  banks  and 
credit  institutions  in  all  the  belligerent  countries  are 
to-day  filled  to  overflowing  with  war  paper,  but  the 
distribution  of  these  holdings  cannot  be  regarded  as 
final,  and  one  of  the  problems  of  the  future  will  be  the 
absorption  of  this  paper  by  the  investing  public. 

(17)  Success  of  the  Loans. —  In  view  of  the  enormous 
sums  secured  by  the  Governments  and  the  wide  distribu- 
tion of  the  bonds  there  can  be  no  question  as  to  the 
success  of  the  loans.  This  was  made  possible  by  the 
complete  mobilization  of  all  the  financial  resources  of 
the  belligerents  for  the  single  purpose  of  financing  the 
war.  The  business  of  the  banks  was  reorganized,  the 
amount  and  character  of  the  currency  determined,  the 
exchange  market  regulated,  and  the  exportation  of  gold, 
securities,  and  other  forms  of  capital  prohibited  —  all 
to  this  single  end.  The  loan  market  was  reserved  at 
intervals  exclusively  for  Government  issues,  and  at  all 
times  the  use  of  credit  for  non-governmental  purposes 
was  discouraged.  The  production  of  non-essentials  was 
curtailed,  the  placing  of  foreign  loans  was  forbidden  or 
greatly  restricted,  issues  of  corporate  securities  were 
strictly  controlled  and  were  permitted  only  in  case  the 
industry  could  be  shown  to  be  one  which  would  assist 
in  the  prosecution  of  the  war.  In  short,  all  available 
capital  was  requisitioned  as  far  as  possible  for  the 
needs  of  the  State,  and  private  industry  was 
rationed  with  regard  to  capital  as  thoroughly  as  indi- 
viduals were  with  regard  to  food.  This  devotion  of  all 
available  financial  means  to  war  purposes  was  made 

158 


LOANS  IN  EUROPE 

possible   by    the    active    and    patriotic    cooperation    of 
lenders  and  of  the  credit  institutions. 

So  much  for  general  considerations.  There  are  re- 
vealed here  many  and  important  likenesses  in  the  loans 
of  all  countries,  but  it  is  likewise  evident  that  the 
financing  of  each  nation  vi^as  determined  in  a  large 
measure  by  national  habits  and  characteristics.  A  brief 
survey  of  the  war  loans  of  the  principal  belligerents  is 
therefore  of  interest  and  essential  to  the  present  study. 

The  British  Treasury  tried  many  financial  devices 
for  securing  funds.  At  the  beginning  of  the  war  it 
issued  Treasury  bills  and  also  secured  advances  from  the 
Bank  of  England,  which  together  provided  the  neces- 
sary funds  until  the  first  war  loan  was  issued  in 
November,  1914.  It  also  made  use  of  long-dated 
Exchequer  bonds  which  were  used  to  fund  Treasury 
bills  when  the  amount  of  the  latter  outstanding  became 
too  large.  Later  periodic  loans  were  supplanted  by  a 
policy  of  continuous  borrowing  wnthout  fixed  subscrip- 
tion periods  or  limitation  to  any  one  type  of  security. 
Unlike  Germany,  the  British  Government  did  not  follow 
any  prearranged  plan  but  experimented  with  various 
devices  in  conformity  with  changing  conditions  and 
needs.  In  addition  to  the  more  formal  loans  it  resorted 
abo  to  the  sale  of  war  savings  and  war  expenditure 
certificates. 

To  secure  the  funds  necessary  to  finance  the  first 
operations  of  the  war  the  Chancellor  of  the  Exchequer 
resorted  at  once  to  the  issue  of  Treasury  bills.  Because 
of  the  interruption  of  normal  trade  the  banks  had  con- 
siderable sums  of  idle  money  which  they  were  glad  to 
invest  by  discounting  these  bills  at  rates  as  low  as  3^ 

159 


WAR  COSTS  AND  THEIR  FINANCING 

per  cent.  Since  it  could  secure  money  on  sucli  easy 
terms,  there  was  a  tendency  on  the  part  of  the  Treasury 
to  rely  upon  this  form  of  short-term  obligation,  but  as 
the  Treasury  bills  grew  in  volume,  they  became 
unwieldy  and  it  was  necessary  to  fund  them  into 
long-term  bonds.  During  the  period  from  August  1  to 
December  31,  1914,  there  were  six  emissions  of  Treasury 
bills  of  $75,000,000  each.  These  were  met  in  part  by 
the  issue  of  the  first  war  loan  in  November.  The  net 
issue  of  Treasury  bills  for  the  fiscal  year  ending  March 
31,  1915,  amounted  to  $320,750,000. 

The  first  war  loan  amounted  to  $1,750,000,000,  in 
3^/2  pt^r  cent.  1925-1928  bonds  at  95.  In  addition  to  this 
popular  loan  the  Treasury  also  sold  three  per  cent,  five- 
year  Exchequer  bonds  to  the  amount  of  $238,500,000. 
Advances  from  the  Bank  of  England  during  this  period 
amounted  to  $800,000,000.  The  loans  from  the  begin- 
ning of  the  war  to  the  end  of  the  fiscal  year  on  March 
31,  1915,  resulted  almost  in  doubling  the  pre-war  debt. 
They  are  shown  in  the  following  table : 

Borrowing  in  Great  Britain,  Fiscal  Year  1915 

Pre-war    debt    $3,538,270,550 

Treasury  bills,   net    .$320.7.50.000 

3  per  cent.  1920  Exchequer  bonds 238,500,000 

SVz  per  cent.  1914  war  loan,  .t 1.480.000,000 

Advances  from  Bank  of  England 802.138.115 

Total $2,841,438,115 

At  the  beginning  of  the  fiscal  year  1915-16  it  was 
realized  that  the  war  was  not  to  end  as  speedily 
as  had  been  optimistically  anticipated  at  first.  The 
expenditures  for  the  coming  year  were  estimated  at 
$5,633,270,000,  and  revenue  receipts  were  expected  to 
yield  $1,351,660,000,  leaving  a  balance  of  .$4,311,610,000 

160 


LOANS  IN  EUROPE 

to  be  met  by  loans.  The  immediate  needs  of  the 
Treasury  were  met  by  the  sale  of  short-term  securities. 
Treasury  bills  were  issued  in  large  amounts  at  compara- 
tively low  rates  of  interest,  and  by  June  21,  1915,  the 
amount  of  these  bills  outstanding  was  $1,175,000,000. 
It  was  felt  to  be  unwise  further  to  swell  the  floating 
debt,  and  accordingly  a  second  war  loan  was  issued. 
Chancellor  McKenna  in  commenting  upon  this  loan  gave 
three  reasons  for  its  issue,  namely,  that  it  did  not  mature 
for  a  long  period  (30  years),  that  its  issue  would  help 
the  foreign-exchange  situation,  and  that  the  resort  to 
long-term  loans  was  economical  both  in  rate  of  interest 
and  in  cost  of  administration.  This  second  loan  differed 
from  the  first  in  several  respects.  The  rate  of  interest 
was  higher,  and  the  loan  was  unlimited  in  amount,  the 
latter  provision  being  made  in  order  to  enable  the  con- 
version of  older  Government  securities  into  this  new 
loan.  As  a  matter  of  fact,  most  of  the  1914  Si/os  and  a 
considerable  part  of  the  consols  were  converted  into  this 
new  war  stock.  In  order  to  attract  small  investors  the 
Post  Office  was  authorized  to  S'cll  small  denomination 
bonds  of  $25  and  $125  and  also  scrip  vouchers  of  $5, 
$2.50,  and  $1.25  which  could  be  applied  on  the  purchase 
of  the  bonds. 

The  first  loan  had  been  taken  principally  by  the  large 
financial  institutions  and  wealthy  subscribers,  the  total 
number  of  subscribers  being  only  100,000,  but  the 
second  loan  was  taken  by  1,100,000  subscribers,  and  at 
the  same  time  the  amount  was  almost  doubled.  The 
proceeds  of  this  loan  sufficed  to  meet  the  expenditures 
for  but  three  or  four  months,  so  rapidly  were  they 
increasing.  The  Chancellor  was  consequently  forced  to 
make  use  of  every  credit  device  available.  In  addition 
to  the  war  loan  of  June  recourse  was  had  also  to  short- 

16X 


WAR  COSTS  AND  THEIR  FINANCING 

term  Exchequer  bonds,  to  loans  in  the  United  States, 
to  war  expenditure  and  war  savings  certificates,  and  at 
all  times  to  Treasury  bills.  By  the  end  of  the  fiscal 
year  1915-16  a  total  of  some  $6,779,297,280  had  been 
secured  from  all  these  sources,  from  which  must  be 
deducted  $802,138,115  repaid  to  the  Bank  of  England. 
The  borrowings  of  the  year  are  shown  in  the  following 
table : 

BoBEOwiNG  IN  Geeat  Beitain,  Fiscal  Yeae  1916 

Treasury  bills,  net    $2,464,090,000 

31/2  per  cent.  1914  war  loan 178,992,040 

3  per  cent.  Exchequer  bonds,   1920 1,211,725 

41/3  per  cent,  war  loan,   1915 2,961,725,900 

5  per  cent.  Exchequer  bonds,   1920 768,445,000 

United  States  Anglu-French  loan 254,100.115 

Other  advances    (Bank  of  England) 99,482..500 

$6,779,297,280 
Less  repayment  to  Bank  of  England 802,138,115 

Net  debt  created  by  borrowing,  1915-16 $5,077,159,165 

Large  as  were  these  sums,  the  needs  of  the  next  fiscal 
year  were  larger.  By  the  end  of  the  fiscal  year  1917 
the  daily  cost  was  over  $35,000,000.  Although  drastic 
increases  were  made  in  taxation,  it  was  necessary  to  rely 
mainly  upon  loans  to  secure  the  $11,000,000,000  which 
the  war  cost  Great  Britain  that  year.  Short  term  Ex- 
chequer bonds  to  a  total  amount  of  over  $1,750,000,000 
were  sold,  bearing  five  and  six  per  cent,  interest. 
Three  loans  were  floated  in  the  United  States  and  one 
in  Japan.  War  savings  and  war  expenditure  certificates 
were  utilized  to  secure  the  savings  of  small  investors, 
and  in  February,  1917,  a  third  war  loan  was  floated. 

This  third  loan  was  issued  in  two  forms,  (1)  five  per 
cent,  bonds  redeemable  1929-1947,  issued  at  95,  and  sub- 

162 


LOANS  IN  EUROPE 

ject  to  taxation  and  (2)  four  per  cent,  income  tax-com- 
pounded bonds  redeemable  1929-1942,  issued  at  par. 
Subscriptions  amounted  to  $5,001,564,750,  but  only 
$3,901,885,000  was  covered  into  tbe  Treasury  before  the 
end  of  the  fiscal  year.  The  public  showed  an  unmistak- 
able preference  for  the  taxable  bond  at  the  higher  rate 
of  interest,  as  only  $110,000,000  was  subscribed  in  the 
tax-free  form.  A  new  type  of  sinking  fund  was  pro- 
vided for  in  this  loan,  which  was  to  be  used  in  purchas- 
ing stock  whenever  it  fell  below  the  issue  price ;  each 
month  one-eighth  of  one  per  cent,  was  to  be  set  aside 
until  the  sum  of  $50,000,000  had  accumulated.  Most 
of  the  4I/2  per  cent,  stock  of  the  previous  loan  was 
converted  into  the  new  issue,  but  there  were  no  con- 
version rights  for  the  consols  and  the  1914  3I/2S,  both  of 
which,  as  a  result,  declined  markedly.  The  total  num- 
ber of  subscribers  to  this  loan  was  5,289,000,  showing 
a  growing  determination  on  the  part  of  the  British 
people  to  see  the  war  through,  and  also  evidencing  the 

BoBROWiNG  IN  Geeat  Beitain,  Fiscal  Year  1917 

Treasury  bills   $8,949,774,000 

iy,  per  cent,  war  loan,   1925-45 2,120 

5  per  cent.  Exchequer  bonds    (U.  S.  loans) 904.493.000 

6  per   cent.   Exchequer   bonds 804,758,500 

^Yar   expenditure   certificates   149,392.500 

War  savings  certificates   363.750,000 

Other   debt   1  059,479.405 

4  and  5  per  cent,  war  loans 3,r!01,8S3,550 

Other   advances   988.150.000 


$17,721,684,075 
Less  redemptions  of: 

Treasury    bills    $9,441,130,000 

War  loans  and  Exchequer  bonds  6,428,525 

War  expenditure   certificates....  31.587.500 

Other   debt   93,029,925 

9,572,175.950 

Net  debt  created  bv  borrowing,   1916-17 $8,149,508,125 

163 


WAR  COSTS  AND  THEIR  FINANCING 

efficiency  of  the  publicity  work  which  by  now  had  been 
developed  to  a  high  degree. 

"With  the  proceeds  of  this  loan  it  was  possible  to 
reduce  outstanding  Treasury  bills,  of  which  nearly 
$9,000,000,000  had  been  issued  during  the  fiscal  year. 
The  net  borrowings  of  the  year  ending  March  31,  1917, 
are  shown  in  the  table  on  page  163. 

The  cost  of  the  war  increased  somewhat  during  the 
next  year,  but  the  high-water  mark  had  practically  been 
reached.  The  daily  expenditure  amounted  to  about 
$37,000,000,  but  although  the  increase  in  cost  was  slight, 
the  additions  to  the  revenues  were  equally  small,  so 
that  greater  resort  had  to  be  made  to  borrowing  than 
had  been  anticipated.  The  fiscal  year  1918  was  marked 
by  two  notable  changes  in  the  loans  of  the  British 
Government.  In  the  first  place  the  advances  from  the 
United  States  Government  furnished  a  needed  and 
welcome  relief  to  the  strain  imposed  upon  the  British 
Treasury.  During  the  fiscal  year  1917-18  these  advances 
amounted  to  $2,390,000,000.  Second,  in  the  raising  of 
internal  loans  a  new  policy  was  inaugurated  in  October, 
1917,  when  the  plan  of  fixed  subscription  periods  for 
the  sale  of  bonds  was  superseded  by  the  day-to-day 
borrowing  plan.  It  was  stated  by  the  Chancellor  of  the 
Exchequer  that  a  minimum  amount  of  $100,000,000  a 
week  would  be  needed  to  make  this  method  a  success  in 
meeting  war  expenditures.  In  his  budget  speech  of 
j\Iarch  13,  1918,  he  announced  that  since  October  1, 
1917,  the  total  sales  had  amounted  to  $2,850,000,000, 
which  was  slightly  more  than  the  prescribed  minimum. 

The  bonds  offered  for  sale  under  this  plan  consisted 
of  four  issues  of  different  maturities,  all  of  which  were 
sold  at  par.  There  was  a  four  per  cent,  ten-year  bond 
which  was  exempt  from  income  tax,  and  three  five  per 

164 


LOANS  IN  EUROPE 

cent,  issues  due,  respectively,  in  1922,  1924,  and  1927, 
payable  at  102,  103,  and  105,  respectively.  The  denomi- 
nations were  made  as  low  as  $250,  and  no  limit  was 
placed  upon  the  amount  which  the  Treasury  would 
accept.  The  bonds  under  these  issues  were  accepted 
for  death  duties,  excess-profits  taxes,  or  munitions 
Exchequer  payments  on  the  part  of  residents  of  Great 
Britain.  In  addition  to  these,  short-term  obligations 
were  also  used,  so  that  the  plan  of  continuous  borrowing 
combined  Treasury  bills,  short-term  Exchequer  bonds, 
and  long-term  war  bonds.  By  the  first  immediate  neces- 
sities were  met,  which  could  be  funded  into  the  second 
and  disposed  of  temporarily,  and  the  third  funded  the 
debt  for  a  longer  period.  So  successful  was  this  plan 
that  the  experiment  finally  developed  into  a  distinct 
loan  policy.  Its  success  was  due  in  large  measure  to 
the  efficient  publicity  methods  used  and  also  to  the  fact 
that  restrictions  on  the  issue  of  new  securities  for  indus- 
trial or  local  purposes  practically  reserved  the  market 
for  Government  loans.     The  day-to-day  borrowing  plan 

Borrowing  in  Great  Britain,  Fiscal  Year  1918 

Treasury  bills,  net $2,544,425,000 

5  per  cent.  Exche<iuer  bonds,   1922 411,352,000 

6  per  cent.  Exchequer  bonds,   1920 220,000 

3  per  cent.  Excheque.-  bonds,   1930 60,106,000 

War   savings   certificates    311,100.000 

Other  debt   (U.  S.  Government  loans,  etc.) 3,707,520,490 

4  and  5  per  cent,  war  loans 840,413,100 

National   war  bonds    3,071,075,000 

$10,946,111,590 
Less  redemptions  of: 

War  loans,  Exchequer  bonds,  etc..  $114,578,185 

War    expenditure    certificates 3,143,500 

Other   debt   retired   505,345.165 

Advances   repaid 126,275,735 

749.342.585 

Npt  debt  created  by  borrowing $10,196,769,005 

165 


WAR  COSTS  AND  THEIR  FINANCING 

was  finally  closed  on  January  18,  1919,  having  resulted 
in  a  yield  of  $8,002,955,275  during  its  life.^ 

The  net  borrowings  for  the  fiscal  year  1917-18  are 
shown  in  the  table  on  page  165. 

Expenditure  during  the  fiscal  year  1918-19  remained 
very  steady,  and  as  a  result  of  this  and  other  factors  the 
total  borrowings  declined  somewhat.  This  was  due  to 
two  principal  causes :  first,  the  Armistice  in  November 
ended  actual  warfare,  and  second,  revenues  increased. 
The  day-to-day  borrowing  continued ;  advances  from  the 
United  States  Government  were  steady;  war  savings 
certificates  brought  in  $447,500,000,  and  advances 
from  the  Bank  of  England  from  time  to  time  made 
up  the  deficit  in  Treasury  needs,  reaching  a  total  of 
$1,313,000,000. 

In  January,  1919,  after  the  discontinuance  of  the 
day-to-day  national  war  bonds,  the  fourth  war  loan 
was  announced.  It  .consisted  of  two  issues  of  five  per 
cent,  bonds  subject  to  the  income  tax,  with  5-  and 
10-year  maturities,  respectively,  and  four  per  cent,  tax- 
compounded  bonds  with  a  10-year  maturity.  The  issue 
price  of  the  5s  was  at  par,  and  that  of  the  4s  at  101.5 
as  before,  and  the  prices  at  which  the  bonds  were 
redeemable  remained  as  before,  namely,  102  for  the 
five-year  5s,  105  for  the  10-year  5s,  and  par  for  the 
four  per  cents.  The  new  issues  differed  from  the  old, 
however,  in  that  the  seven-year  maturity  bonds  were 
dropped,  and  the  new  bonds  were  given  no  rights  of 
conversion  into  past  or  future  war  loans.  The  first 
official  announcement  of  the  total  subscriptions  to  the 
loan  was  made  by  the  Chancellor  of  the  Exchequer, 
Austen  Chamberlain,  on  July  17,  1919.^    He  stated  that 

^Economist,  Januar/  25,  1919.  p.  98. 

^Commercial  and  Financial  Chronicle,  July  19,   1919,  p.  208. 

166 


LOANS  IN  EUKOFJ^: 

the  grand  total  was  $3,540,000,000  of  which  $2,695,000,- 
000  was  new  money.  These  figures  fell  considerably 
below  the  estimates,  and  tlie  yield  was  less  than  had  been 
hoped  for. 

Great  Britain's  borrowings  during  the  fiscal  year 
1918-19  are  shown  in  the  following  table : 

BoRROwiTfG  IN  Credit  Britain,  Fiscal  Year  1919 

5  per   cent.  Exchequer  bonds $20,175 

6  per  cent.  Exchequer  bonds,   1920 4,185 

3  per  cent.  Exchequer  bonds,    1930*. 4,018,000 

War   savings   certilicates   447,500,000 

United  States  advances  and  other  debt 2,776,123.000 

National  war   bonds    5,332,068.900 

Advances  from  Bank  of  England 1,313,603,235 

$9,873,337,515 
Less  redemptions  of: 

Treasury  bills    $82,320,000 

War  expenditure   certificates   114,661,500 

War  loans  and  Exchequer  bonds..      329,795,360 

Foreign  debt  retired   772,123,795 

1.298,900,655 

Net  debt  created  by  borrowing $8,574,436,860 

The  total  war  borrowings  of  the  British  Government, 
less  redemptions,  from  August  1,  1914,  to  March  31, 
1919,  were  as  follows : 

Total  Borrowing  in  Great  Britain,  1914-1919 

Treasury  bills,  net   $4,705,590,000 

Anglo-French  loan   in  United  States 254,100,115 

United     States     Government     and     other     foreign 

loans 6,873,874,030 

Bank    of    England    advances    through    Wavs    and 

Means '. 2,274,960,000 

War  savings  certificates    1,122,250,000 

3,    5    and    6    per    cent.    Exchequer 

bonds $3,193,308,585 

War  loans 11.483.014,590 

$13.676,.323.175 

Less   redemptions    450.802,070 

13.225,521,105 

Total  debt  created  by  borrowing $28,456,295  250 

167 


WAR  COSTS  AND  THEIR  FINANCING 

The  history  of  loans  in  France  begins  with  the  pre- 
war loan  which  was  issued  on  July  7,  1914.  This  was  for 
$180,000,000,  in  31/2  per  cent.  25-year  bonds  issued  at 
91,  and  was  for  the  purpose  of  meeting  the  deficit 
occasioned  by  the  expenditures  in  Morocco  and  the 
extension  of  the  army  and  navy.  Although  the  loan 
was  37  times  oversubscribed,  it  immediately  became  a 
stumbling  block  which  hampered  war-time  finance  in 
the  succeeding  months.  Two  of  the  four  instalments 
fell  due  after  the  war  was  declared,  and  it  was  finally 
disposed  of  by  being  converted  into  the  first  war  loan. 

Following  the  practice  of  most  of  the  other  Conti- 
nental countries,  the  Government  on  the  outbreak  of 
war  turned  at  once  to  the  Bank  of  France  for  financial 
assistance.  This  institution  stands  in  very  close  rela- 
tion to  the  Government.  In  return  for  the  renewal  of 
its  charter  in  1897  for  23  years,  it  was  under  obligation 
to  lend  to  the  Government  certain  agreed  sums  at  the 
nominal  rate  of  one  per  cent.  In  1911  these  compulsory 
advances  had  been  fixed  at  $580,000,000,  but  in  Septem- 
ber, 1914,  they  were  increased  to  $1,200,000,000,  and  in 
May,  1915,  to  $1,800,000,000.  During  the  first  five 
months  of  the  war,  from  August  1  to  December  31,  1914, 
the  actual  advances  of  the  Bank  of  France  to  the  Gov- 
ernment amounted  to  $785,000,000,  constituting  about 
two-thirds  of  all  the  money  borrowed. 

In  addition  to  the  returns  from  the  31/2  per  cent,  loan 
and  the  advances  from  the  Bank  of  France,  an  appeal 
was  made  direct  to  the  small  investor  by  the  offer  of 
short-term  Treasury  bills  known  as  hojis  de  la  defense 
nationale,  bearing  four  per  cent,  for  the  three-months' 
issue  and  five  per  cent,  when  issued  for  six  months  or  a 
year.  They  were  sold  at  96.60  in  denominations  as  low 
as  100  francs  and  were  also  used  to  pay  contractors  for 

168 


LOANS  IN  EUROPE 

militaiy  supplies.    By  the  end  of  December,  1014,  about 
$;];39,600,000  of  these  hons  had  been  issued. 

The  credit  operations  of  the  last  five  months  of  1914 
may  be  summarized  as  follows : 

Borrowing  in  France,  1914 

Correspondents  of  the  Treasury $80,700,000 

Ordinary  Treasury   bills   23,820,000 

Bans  dc  la  defense  rationale 339, 460, 000 

31/2  per  cent,  pre-war  loan 43,940.000 

Advances  from  Banks  of  France  and  Algeria 785.000,000 


$1,272,920,000 


The  year  1915  saw  little  change  in  the  use  of  credit 
or  credit  devices  by  the  French  Government.  The  tax 
situation  was  slightly  bettered  during  this  year,  revenues 
being  only  19  per  cent,  below  normal,  whereas  in  the 
last  five  months  of  1914  they  had  been  38  per  cent, 
below  normal.  On  the  other  hand,  expenditures  were 
mounting  rapidly  and  the  needs  of  the  Treasury  were 
steadily  growing.  Further  advances  were  accordingly 
secured  from  the  Bank  of  France,  which  by  the  end  of 
the  year  stood  at  $1,080,000,000.  Bons  de  la  defense 
nationale  to  the  amount  of  about  $1,400,000,000  were 
also  issued  during  the  year.  These  found  a  ready  sale, 
not  merely  in  France,  but  also  in  England  and  the 
United  States.  In  February,  1915,  a  second  type  of 
short-term  obligation  was  offered  to  the  public,  known 
as  obligations  de  la  defense  nationale.  These  were  five 
per  cent.  10-year  bonds  issued  at  96.5  without  limitation 
of  amount.  Bons  and  the  pre-war  SV^s  could  both  be 
funded  into  the  new  issues,  the  latter  at  91. 

The  obligations  had  two  features  which  were  signifi- 
cant of  the  difficulties  that  faced  the  Treasury,  both 
designed    to    make    the    security    more    attractive    to 

169 


WAR  COSTS  AND  THEIR  FINANCING 

investors :  they  were  tax-exempt,  and  the  interest  was 
paid  in  advance.  The  former  was  a  decided  break  in 
French  practice,  because  all  bonds  hitherto  issued  had 
been  taxable.  The  second  feature,  payment  of  interest 
in  advance,  was  not  only  without  precedent  in  France, 
but  was  probably  without  parallel  in  the  financial  history 
of  modern  European  states.  By  the  end  of  the  year 
the  issues  amounted  to  about  $760,000,000,  a  large  part 
of  which,  however,  consisted  of  conversions  of  existing 
obligations. 

In  October,  1915,  the  Anglo-French  Loan  was  placed 
in  the  United  States,  netting  the  Government  in  all 
about  $250,000,000,  of  which  $80,020,000  was  paid  in 
during  the  year  1915.  All  these  sums  proved  insufficient, 
however,  and  in  November  the  first  national  loan  was 
issued.  This,  known  as  the  "  National  Defense  Loan," 
consisted  of  a  five  per  cent,  perpetual  rente  issued  at  88. 
Exemption  from  taxation  was  granted  as  to  both  princi- 
pal and  interest.  This  loan  proved  to  be  very  popular, 
the  number  of  subscribers  being  4,156,000.  The  total 
amount  subscribed  was  $2,648,500,000,  of  which  about 
half  represented  fresh  money  and  the  other  half  conver- 
sions of  Treasury  bills  and  bonds.  About  $2,200,000,000 
was  paid  in  before  the  end  of  the  fiscal  year. 

The  transactions  for  the  year  1915  may  be  summarized 
in  the  following  table : 

BORROWTXG  IN   FRANCE,    1915 

Treasury  bills    [Ions) $1,204,600,000 

National   defense   obligations   126.400,000 

Anglo-French  Loan  in  United  States 80.020.000 

National  War  Loan.  November,  1915 2.193.400.000 

Advances  bv  Bank  of  France 230.000  000 

Miscellaneous.  . 46  800  000 

Total $3,971, 220. 000 

170 


LOANS  IN  EUROPE 

During  the  year  1916  the  same  policy  was  continued. 
The  advances  of  the  Bank  of  France  continued  to  grow 
steadily  during  the  year,  from  $1,060,000,000  on  Janu- 
ary 6  to  $1,760,000,000  on  October  19.  The  Government 
was  then  able  to  reduce  this  floating  indebtedness  to  the 
Bank  with  the  proceeds  of  the  second  war  loan,  bringing 
the  amount  down  to  $1,330,000,000  on  November  2, 
1916,  but  by  the  end  of  the  year  (December  31)  it  had 
increased  again  to  $1,460,000,000. 

The  chief  dependence  of  the  Government,  however, 
was  the  bo7is,  of  which  over  $3,000,000,000  were  issued 
during  the  year.  In  February,  1916,  a  $30,000,000 
credit  for  war  munitions  purchases  was  raised  in  the 
United  States,  and  in  July  a  $100,000,000  collateral  loan 
was  negotiated  through  the  American  Foreign  Securities 
Company,  consisting  of  five  per  cent,  three-year  gold 
notes  issued  at  98.  Another  collateral  loan  of  $50,000,000 
was  placed  in  the  United  States  in  September.  Foreign 
credits  were  also  created  by  the  French  Government 
during  this  year  by  the  shipment  of  gold  to  England, 
and  about  $80,000,000  was  borrowed  in  Japan,  Argentina, 
Switzerland,  Holland,  Spain,  and  other  neutral  countries. 
In  October,  1916,  a  second  war  loan  was  issued.  This 
was  a  perpetual  rente  at  five  per  cent,  similar  to  the 
first  loan,  issued  at  88.75.  The  subscriptions  amounted 
to  $2,272,000,000.  The  loan  transactions  of  this  year 
are  summarized  on  page  172. 

The  year  1917,  like  the  two  previous  years,  saw 
France  still  financing  the  war  on  credit,  primarily  hy 
the  use  of  short  term  securities.  As  the  burden  of  the 
war  became  greater,  expenditures  grew  much  more 
rapidly  than  additions  to  tax  receipts,  and  accordingly 
larger  amounts  had  to  be  raised  by  means  of  loans. 
Over  three-quarters  of  the  credits  granted  for  the  year 

171 


WAR  COSTS  AND  THEIR  FINANCING 


Borrowing  in  Fkance,  1916 

Balance  of  Anglo-French  Loan $170,000,000 

United  States   collateral  loans 150,000,000 

Treasury  bills  sold  in  England 463,000,000 

Bons,   unconverted    2,633,200,000 

Second  loan,   1916,  new  money 1,136,000.000 

Advances  from  Bank  of  France 400,000,000 

Advances  from  Bank  of  Algeria 9,000,000 

Obligations 207,400,000 

Credits  in  England  by  gold  shipments 300.000,000 

Other  forci!?n  credits' 80,000.000 

Ordinary  Treasury  bills   28,400,000 

Total $5,577,000,000 


1917  wa.s  raised  by  unfunded  debt.  The  Bank  of  France 
contributed  about  $1,020,000,000;  hons  dc  la  defense 
naiionale,  the  issue  of  which  had  been  suspended  at  the 
time  of  the  second  war  loan,  were  resumed  in  February, 
1917,  and  by  tlie  end  of  the  year  the  total  emissions  for 
the  year  totalled  $8,020,000,000.  The  Treasury  also 
resumed  the  issue  of  obligations  in  March,  and  of  these 
there  were  some  $60,000,000  outstanding  just  before  the 
November  loan.  In  addition  to  these  two  issues  a  new 
kind  of  security  wa.s  put  out,  beginning  March  1,  1917, 
which  may  be  called  ol)ligations-l)ons,  for  it  united  the 
characteristics  of  both  these  securities,  *  They  were  issued 
at  par,  bore  five  per  cent.,  and  were  repayable  at  the 
end  of  any  six-months'  period.  If  the  purchaser  held 
them  until  the  end  of  the  five-year  period,  however,  he 
received  a  bonus  of  half  a  year's  interest.  By  the  end 
of  the  year  there  were  outstanding  of  these  securities 
some  $4,000,000,000. 

In  April  of  this  year  another  $100,000,000  collateral 
loan  was  placed  in  the  United  States  in  the  form  of 
51/0  per  cent,  convertible  two-j'-ear  gold  notes  offered  to 
the  public  at  99,  yielding  slightly  over  six  per  cent.,  and 
a    $15,000,000    industrial    credit    was    also    arranged, 

172 


LOANS  IN  EUROPE 

covered  by  French  Treasury  bills.  Treasury  bills  were 
sold  in  England  to  the  amount  of  $600,000,000. 

After  the  entry  of  the  United  States  into  the  war  on 
April  6,  1917,  the  United  States  Government  became 
banker  for  the  Allies.  The  United  States  Treasury 
advanced  to  France  during  the  remainder  of  the  year 
1917  the  sum  of  $1,285,000,000. 

Large  as  were  these  sums,  they  were  yet  insufficient 
to  meet  the  growing  needs  of  the  French  Treasury, 
and  it  became  necessary  to  issue  a  third  war  loan  in 
November,  1917.  This  was  a  four  per  cent,  perpetual 
rente  issued  at  68.60.  This  loan  was  limited  to 
$2,000,000,000  real  capital  or  $2,600,000,000  nominal 
capital.  The  new  loan  was  exempt  from  the 
income  tax.  Various  measures  were  taken  at  the 
time  of  its  issue  to  maintain  its  price :  it  was  made 
acceptable  at  its  issue  price  for  the  payment  of  the 
excess-profits  tax,  and  a  fund  was  constituted  for  the, 
purchase  of  these  bonds  in  the  open  market  if  they 
should  fall  below  the  price  of  issue.  The  results  of  this 
loan  were  very  satisfactory,  the  subscriptions  amounting 
to  $2,914,000,000,  of  which  about  half  represented  fresh 
money  and  the  other  half  conversions  of  hons,  obliga- 
tions, and  other  securities. 

The  total  borrowings  for  the  year  1917  were : 

Borrowing  in  France,  1917 

Advances  from  Bank  of  France $1,020,000,000 

Advances  from  Bank  of  Algeria 8,000.000 

Bons,  net 1.667,000.000 

Collateral  loan  in  United  States.  April,   1917 100. 000.000 

Industrial  credit  in  United  States l.o.OOO.OOO 

Oiligations-hons,    net    2.7iri.000  000 

Advances  from  United  States   Government 1,285.000.000 

Treasury  bills  sold  in  England 600.000.000 

1917  war  loan,  less  conversions 1.423.000.000 

Total $8,833,000  000 

173 


WAR  COSTS  AND  THEIR  FINANCING 

The  war  expenditure,  already  crushing,  was  raised 
during  the  year  1918  to  even  greater  heights.  The  total 
credits  granted  for  the  year  aggregated  $10,671,000,000, 
to  meet  which  the  Government  relied  for  the  most  part 
on  loans.  The  advances  from  the  Bank  of  France  still  con- 
tinued, the  net  for  the  year  being  $930,000,000,  and 
the  total  on  December  26  being  $3,430,000,000.  Bons 
de  la  defense  nationale  continued  to  be  extremely  popu- 
lar and  represented  a  steady  and  dependable  reliance  of 
the  Government  at  all  times.  The  sale  of  these  hons  con- 
tinued steadily  from  month  to  month,  by  December 
reaching  a  maximum  of  $100,000,000  a  week,  with  a 
total  for  the  year  of  $2,614,000,000 ;  in  fact,  so  popular 
were  they  that  the  Government  found  it  possible  by  the 
end  of  the  year  1918  to  reduce  the  rate  of  interest  on 
the  one-  and  three-month  hons  from  five  to  four  per  cent. 

Toward  the  end  of  the  year  the  amount  of  short-term 
obligations  and  of  the  floating  debt  became  so  great  that 
it  was  necessary  to  fund  them  into  long-term  bonds. 
Accordingly  the  fourth  war  loan  was  announced  in 
October,  1918.  This  was  a  four  per  cent,  perpetual 
rente,  free  from  taxation  and  inconvertible  for  at  least 
25  years.  It  was  issued  at  60.80,  and  no  limit  was 
placed  upon  the  amount  of  the  loan.  Provision  was 
made  for  acceptance  in  part  payment  of  hons,  ohliga- 
tions,  31/2  per  cent,  redeemable  rente  scrip,  Treasury 
bills,  and  coupons  of  Russian  Government  bonds  matur- 
ing during  the  year  1918.  In  spite  of  the  supposed 
financial  exhaustion  of  France,  the  subscriptions  to  this 
loan  reached  the  total  of  $6,000,000,000  nominal  capital, 
representing  a  net  yield  to  the  Treasury  of  $4,300,000,- 
000.  In  addition  to  the  sums  raised  at  home,  France 
obtained  during  the  year  1918  advances  from  the  United 
States  Government  to  the  amount  of  $1,151,000,000. 

174 


LOANS  IN  EUROPP] 

The  total  ])orrowings  for  the  year  1918  were : 

Borrowing  in  France,  1918 

Advances  from  Bank  of  France $930,000,000 

1918  war  loan,  less  eonversions 4, ."300. 000.000 

Advances  from  United  States  Government 1,151,000.000 

Eons  and  obligations,  net   4,483. 7")0.000 

Total $10,864,750,000 

During  the  progress  of  the  war  about  one-quarter  of 
the  borrowings  of  tlie  French  people  were  obtained  from 
foreign  countries.  Three-quarters  of  the  enormous  sums 
expended  on  the  war  by  France  were  raised  from  the 
French  people  themselves.  Whatever  criticism  may  be 
urged  against  the  exclusive  loan  policy  followed  by 
France  in  financing  the  war,  it  must  be  tempered  by 
admiration  of  the  industry  and  thrift  of  the  French 
people  which  made  it  possible  for  them  to  contribute 
such  sums  to  the  defense  of  their  country. 

The  total  government  borrowings  of  France  from 
August  1,  1914,  to  the  end  of  the  year  1918  may  be 
summarized  as  follows : 

Total  Borrowing  in  France,  1914  to  1918 
Nominal  Actual 

War  Loans:     1915     $3,041,000,000     $2,661,600,000 

1916  2.302.800,000       2.016,400.000 

1917  2.900,600,000       2,034,200,000 

1918  6.000,000.000       4,300,000.000 

$14,304,400,000  $11,012,200,000  $11,012,200,000 
Advances  from  United  States  Government  to  Dec. 

31,   1918    2.436.427.000 

Advances  from  Great  Britain    2.170.000,000 

Private    loans    in    United    States,    collateral    and 

industrial 686.000.000 

Loans  in  neutral  countries    150.000.000 

Advances  from  Bank   of  France 3.430.000.000 

Advances  from  Bank  of  Algeria  17,000.000 

Floating  debt    (bans,  obligations,  etc.) 4.483.750.000 

$24,250,377,000 

175 


WAR  COSTS  AND  THEIR  FINANCING 

Tlie  financial  policy  followed  by  Russia  in  the  war 
was  similar  to  that  adopted  by  the  other  European 
belligerents.  It  was  stated  distinctly  by  the  Minister 
of  Finance  in  his  budget  speech  of  March,  1916;  the 
civil  expenditures,  he  said,  were  to  be  defrayed  as  far 
as  possible  out  of  taxation,  but  the  cost  of  the  war  and 
deficits  in  the  civil  budget  were  to  be  met  by  loans  and 
issues  of  paper  money.  Taxes  were  never  sufficient  to 
meet  the  civil  budget,  so  that  not  only  were  the  entire 
expenditures  of  the  war  met  by  loans,  but  also  to  some 
extent  the  civil  expenditures.  The  Treasury  conse- 
quently resorted  to  many  forms  of  loans,  and  when 
all  else  failed,  as  indicated  in  an  earlier  chapter,  it 
issued  paper  money. 

During  the  first  few  weeks  of  the  war  the  Government 
depended  for  financial  assistance  upon  the  Imperial 
Bank  of  Russia,  from  which  it  received  advances 
through  the  discounting  of  Treasury  bills  averaging 
about  $50,000,000  a  week.  Short-term  Treasury 
bonds  were  issued  abroad,  and  Russian  Treasury 
bills  were  discounted  by  the  Bank  of  England. 
By  December  31,  1914,  about  $260,000,000  had  been 
borrowed  abroad.  In  addition  to  the  foreign  loans 
the  Government  also  appealed  to  the  people  at  home. 
It  first  issued  short-dated  four  per  cent.  Treasury 
bills  in  August  to  the  amount  of  $150,000,000,  and  in 
July,  October,  and  December  it  issued  short-term  Treas- 
ury bonds  amounting  to  $650,000,000.  In  November 
the  first  war  loan  was  announced,  consisting  of  five  per 
cent.  10-50-year  bonds,  issued  at  95 ;  the  total  subscrip- 
tions yielded  the  Government  the  sum  of  $257,000,000. 
The  transactions  by  loans  of  the  Imperial  Russian 
Government  to  the  end  of  1914  were,  therefore,  as 
follows : 

176 


LOANS  IN  EUROPE 


Borrowing  in  Russia,  1914' 


INTERNAL 


Long-dated  5  per  cent.  40-year  loan,  Oct.  .*? $257,000,000 

Short-dated  4  per  cent.  Treasury  notes,  Aug.  22..  150.000,000 

Treasury  bonds.  July  23,  Oct.  6,  Dec.  26 050,000,000 


EXTERNAL 


Short-dated  Treasury  bonds,  5   per  cent.,   sold   in 

London,   Oct.   6,  Dec.   26 260.000,000 


Total $1 .310,000,000 

The  year  1915  saw  no  change  in  the  financial  policy 
already  established.  The  Go\^rnment  depended  upon 
loans  for  meeting  war  expenditures,  and  in  placing  these 
loans  relied  almost  exclusively  upon  short-term  obliga- 
tions discounted  by  the  Imperial  Bank  or  subscribed  by 
private  banks.  It  was  not  thought  wise  or  feasible  to 
obtain  from  the  poverty-stricken  Russian  people  any 
large  amount  by  issuing  popular  loans.  Continued 
resort  was  had  during  this  year  to  the  Imperial  Bank, 
which  not  only  discounted  Treasury  bills,  but  also  helped 
the  flotation  of  the  war  loans ;  indeed,  the  Bank  itself 
subscribed  two-fifths  of  each  internal  loan  issued  in  1915, 
or  a  total  amount  of  about  $700,000,000. 

During  1915  three  internal  war  loans  were  issued. 
Russian  war  finance  differed  from  that  cf  the  other 
belligerents  in  making  use  of  a  series  of  comparatively 
small  loans  instead  of  large  loans  at  less  frequent  inter- 
vals. The  first  of  the  three  loans  of  1915,  that  is,  the 
second  war  loan,  issued  in  March,  was  a  five  per  cent. 
10-50-year  bond  issued  at  94 ;  subscriptions  amounted  to 
$257,000,000.  Within  two  months  the  third  loan  was 
issued,  which  was  a  5i/2  per  cent,  bond  issued  at  99. 
This  had  two  peculiar  features  which  differentiated  it 

"  The  dates  given  are  those  of  the  Gregorian  calendar,  which  is 
15  days  earlier  than  the  Julian  calendar. 

]77 


WAR  COSTS  AND  THEIR  FINANCING 

from  anything  else  in  Russian  finance  or  in  that  of  any 
other  country:  (1)  the  rate  of  interest  remained  at  51/2 
per  cent,  for  only  six  years,  after  which  it  was  reduced 
to  five  per  cent.;  (2)  the  bonds  were  redeemable  at  par 
in  1921,  but  if  not  presented  at  that  time,  did  not  mature 
until  1996.^  Whether  because  these  features  made  the 
loan  particularly  attractive  or  because  it  was  better 
advertised,  the  subscriptions  were  double  those  of  either 
preceding  loan,  reaching  $515,000,000.  This  sum,  to- 
gether with  other  receipts,  sufficed  the  Government  until 
November,  when  the  fourth  war  loan  was  issued.  This 
was  a  51/^  per  cent.  10-year  bond  issued  at  95.  The 
amount  subscribed  was  the  same  as  the  third  loan, 
$515,000,000. 

In  addition  to  these  long-term  loans  the  Government 
also  issued  during  1915  seven  series  of  short-term 
Treasury  bills  to  a  total  of  $1,625,000,  four  per  cent, 
bills  in  March  and  August  aggregating  $275,000,000, 
and  five  per  cent,  bills  amounting  to  $1,350,000.  Short- 
term  Treasury  bills  amounting  to  $100,000,000  were  dis- 
counted in  Great  Britain  and  France  and  unspecified 
credits  created  abroad  during  the  year  amounted  to 
$3,162,500,000. 

The  result  of  this  exclusive  loan  policy  was  practically 
to  double  the  debt  in  the  year  and  a  half  since  the 
beginning  of  the  war.  The  Russian  public  debt  had 
stood  at  $4,412,105,000  on  January  1,  1914.  A  year  later 
it  was  $5,236,786,  but  at  the  end  of  1915,  during  which 
the  Government  made  full  use  of  its  borrowing  power, 
the  debt  was  raised  to  $9,438,315,500. 

The  loan  transactions  of  1915  were  as  follows : 

'Prospectus  of  loan  jriven  in  "Internal  War  Loans  of  Bellig- 
erent Countries,"  published  by  National  Citv  Bank,  New  York, 
1918,  p.  51. 

178 


LOANS  IN  EUKOFE 
BouuowixG  IX  Russia,   1915 

IXTERXAL 

Second  war  loan,  10-50-vcar,  5  per  cent $257,000,000 

Third  war  loan,  5-10-year,  S'/o  per  cent 515,000,000 

Fourth  war  loan,  10  year,  5%  per  cent 515,000.000 

4  per  cent.  Treasury  "notes,  M~arch  and  August".  .  .  275,000,000 

5  per   cent.    Treasury   bonds,    Feb.    6,    March    27, 

June  18,  July  15,  Aug.  26   1,350,000,000 

EXTERNAL 
5   per   cent,   short-term  Treasury    bonds,    June    10, 

Sept.    9    400,000,000 

Unspecified  credits,  March  13,  April  G,  Oct.  9 3,162,500,000 

Total $6,474,500,000 

The  loans  thus  far  placed  in  Russia  had  been  compara- 
tively small,  but  an  effort  was  made  during  the  next  year 
to  secure  sums  that  would  contribute  measurably  toward 
meeting  the  war  costs.  In  March  the  fifth  internal  loan^ 
was  issued,  consisting  of  a  5i/2  per  cent.  10-year  bond 
issued  at  95,  The  amount  subscribed  was  $1,029,000,000, 
which  was  equal  to  the  proceeds  of  the  two  preceding 
loans.  Successful  as  this  was,  it  was  surpassed  by  the 
proceeds  of  the  sixth  war  loan,  issued  in  October  on  the 
same  terms  as  the  March  loan,  the  yield  of  which  was 
$1,544,000,000.  As  the  net  addition  to  the  debt  during 
the  year  1916  was  $3,172,103,000,  it  is  clear  that  most 
of  the  money  needed  for  war  expenditure  was  being 
obtained  from  long-term  bonds.  There  w^as  left  a  bal- 
ance of  only  about  $600,000,000  to  be  raised  by  short- 
term  Treasury  bills  and  similar  obligations.  During 
1916  the  so-called  "  dollar  loan  "  of  $50,000,000  was 
floated  in  New  York,  and  Treasury  bills  were  sold  in  the 
United  States  to  the  amount  of  about  $35,000,000.  Great 
Britain  afforded  the  chief  market  during  this  period 
for  Russian  Treasury  bills  sold'  abroad,  and  France  took 
the  balance.  The  borrowings  of  1916  are  given  in  the 
following  table : 

179 


WAR  COSTS  AND  THEIR  FINANCING 

BoBEOWiNG  IN  Russia,  1916 

Fifth  war  loan,  10-vear,  51/2  per  cent $1,029,000,000 

Sixth  war  loan,   10-vear,  51/2  per  cent 1,544.000.000 

Dollar  loan    in   the'Unitcd   States 50.000.000 

Treasury  bills  sold  in  England  and  France 600.000,000 

Total $3,223,000,000 

The  year  1917  was  marked  by  such  kaleidoscopic 
changes  of  both  a  military  and  a  political  character  that 
the  mere  narration  of  the  loan  transactions  ceases  to  have 
any  significance.  In  March  the  seventh  war  loan  was 
issued  in  the  form  of  a  five  per  cent.  10-75-year  bond 
issued  at  85.  There  was  here  an  approach  to  the  French 
policy  of  selling  a  low-interest  bond  at  a  discount.  Either 
because  this  feature  made  the  loan  more  attractive  or 
because  the  great  inflation  in  the  paper  money  had  pro- 
vided people  with  more  money  than  hitherto,  the  amount 
subscribed  was  the  largest  yet  obtained,  namely, 
$2,059,000,000. 

In  ]\Iarch  the  revolution  took  place,  and  the  new  Gov- 
ernment was  forced  to  raise  funds  to  carry  on  its 
activities.  For  this  purpose  it  offered  a  so-called  Russian 
Liberty  Loan  of  $1,500,000,000.  This  was  a  five  per 
cent.  40-year  loan,  issued  at  85,  of  which  half  was 
secured  from  bankers  and  the  rest  was  sold  to  the 
public.  A  credit  was  also  obtained  in  the  United  States 
to  a  total  of  $365,000,000,  and  during  the  year  1917 
$187,729,250  of  this  was  advanced  to  Russia.  A  credit 
of  $333,000,000  was  obtained  in  Japan  through  the  sale 
of  Treasury  bills,  the  proceeds  of  which  were  used  to 
pay  for  munitions  bought  in  that  country. 

Because  of  the  disturbed  political  situation  and  the 
uncertain  powers  of  the  Provisional  Government,  little 
could  be  done  in  the  way  of  securing  revenue  from 
taxation;  consequently  reliance  was  placed  upon  loans 

180 


LOANS  IN  EUROPE 

not  merely  for  military,  but  for  practically  all  expendi- 
tures of  the  Government.  The  public  debt  of  Russia, 
which  on  January  1,  1917,  amounted  to  $12,610,4(58,500, 
was  estimated  on  September  7,  1917,  to  have  more  than 
doubled,  standing  then  at  $28,643,904,349.  With  the 
overthrow  of  the  Provisional  Government  by  the  Bol- 
shevist regime  and  the  repudiation  by  the  latter  of  all 
foreign-owned  debt,  the  issue  of  loans,  of  course,  came 
to  an  end.  A  final  survey  shows  Russian  war  borrowing 
to  have  taken  the  forms  shown  in  the  following  table : 

Total  Borrowing  in  Russia,  1914-1917 

Seven   internal   war   loans $6,176,000,000 

Advances   from  Great  Britain 2,840,000.000 

Advances  from  France  on  Treasury  bills 1,085.000,000 

Advances  from  I'nited  States    187, 729. 750 

Advances  from  Japan   on  Treasury  bills 333,000,000 

Private  loans  and  credits  in  United  States 162J500,000 

Advances    from    Bank    of    Russia  by  discount  of 

Treasury  bills    7.230.663.000 

Total   $18,023,892,750 

Loans  formed  the  mainstay  of  Italy's  financial  policy, 
although  she  made  a  valiant  effort  to  enlarge  her  tax 
revenues.  Resort  was  had  both  to  Treasury  bills  and  to 
long-term  war  loans.  During  the  fiscal  year  ending  June 
30,  1915,  when  Italy  Avas  busy  preparing  for  the  war 
although  she  was  not  actually  engaged  in  it,  the  Treasury 
bills  issued  by  the  Government  amounted  to  $309,700,000. 
During  the  following  fiscal  year  the  amount  was  only 
about  half  as  great,  or  $145,000,000.  The  reason  for 
the  lessened  resort  to  temporary  borrowing  was  the  flota- 
tion of  war  loans  during  this  latter  period.  The  so-called 
"  mobilization  loan  "  issued  in  January,  1915,  ante- 
dated Italy's  formal  entrance  into  the  war,  but  it  must 
properly  be  included  in  any  estimate  of  war  costs.    This 

181 


WAR  COSTS  AND  THEIR  FINANCING 

was  a  41/2  per  cent.  10-25-year  bond  issued  at  97.  The 
amount  subscribed  was  $200,000,000  nominal.  The  real 
war  loans  began  with  that  issued  in  July,  1915,  subse- 
quent loans  making  their  appearance  wdth  clocklike 
regularity  in  each  succeeding  January.  In  the  flotation 
of  these  loans  the  Government  availed  itself  of  the 
assistance  of  a  syndicate  of  banks. 

The  public  debt  of  Italy  practically  trebled  in  the 
four  years  ending  June  30,  1918,  while  the  interest 
charge  quadrupled  in  the  same  period.  The  growth  of 
the  debt  and  interest  charges  are  shown  in  the  following 
table : 

Growth  in  Public  Debt  of  Italy,  1914-1918 


Public  debt 

Interest  charge 

1914 

1915 

1916 

1917 

1918 

$2,893,374,032 
3,273,743,460 
4,413,046,485 
5,992,206,192 
8,682.890,299 

$98,848,804 
109,998,237 
174,258,891 
254,818,892 
382,028,327 

These  fig-ures  show  only  the  funded  debt,  and  are 
exclusive  of  the  floating  debt  created  by  advances  from 
banks,  short-term  Treasury  bills,  and  other  similar 
obligations,  although  short  term  obligations  never 
played  so  prominent  a  part  in  Italian  war  finance  as 
they  did  in  England  and  France,  because  of  the  slighter 
financial  development  of  Italy.  The  chief  dependence 
for  domestic  supplies  of  capital  was  from  the  beginning 
placed  on  long-term  loans.  England  and  the  United 
States  supplemented  these  internal  loans  by  credits 
aggregating  $3,375,000,000.  State  note  issues  and 
advances  from  the  three  Italian  banks  of  issue  for 
Government  needs  supplied  $1,700,000,000,  and  short- 

182 


LOANS  IN  EUROPE 

term  Treasury  bonds  and  Exchequer  bills  amounted  to 
$1,600,000,000.  The  following  table  shows  the  Jorms 
taken  by  Italian  borrowing  during  the  war  period: 

Total  Borrowing  in  Italy.  1914-1918 

Mobilization  loan,  Jan.,  1915 .$200,000,000 

First  war  loan,  July,   1915 ^■,2'.>,-2(ii).000 

Second  war  loan,  Jan.,   1916 00-2, SIVO, 000 

Third  war  loan,  Jan.,  1917 797,100,000 

Fourth  war  loan,  Jan.,   1918 1,224.()00,000 


$3,053,700,000 

State  note  issues    .$339,740,000 

Advances  by  bank  notes  issued....       1,376.500.000 

'■ 1,716  240,000 

Advances  from  Great  Britain  to  Aijril,   1919 2,065.000  000 

Advances  from  United  States  to  April,   1919 1,521,500  000 

3-year  and  5-year  Treasury  bonds 650.000  000 

3-year  and   12-month  Exchequer   bills 1,950.000,000 

Private  banking  credit  in  United  States 25.000.000 

Total $10,981,440,000 

The  expenditures  of  the  British  Dominions  which 
were  met  by  the  flotation  of  loans  offered  no  distinctive 
features,  and  it  is  sufficient  to  list  them  in  the  general 
table  on  pages  184  and  185. 

The  expenditures  of  the  other  active  Entente  countries 
were  met  chiefly  by  advances  from  their  more  powerful 
associates,  Great  Britain,  France,  and  later  the  United 
States  furnishing  them  with  the  funds  and  supplies  they 
needed.  Neither  Belgium  nor  Serbia  was  in  a  position 
to  float  loans  of  their  own,  and  Rumania  seems  to  have 
made  no  attempt  to  do  so.  This  method  of  subsidization 
can  hardly  be  characterized  as  a  loan  policy. 

The  original,  carefully  planned  policy  of  Germany 
for  financing  the  war  relied  chiefly  upon  loans  and 
extensive  use  of  bank  credits.  According  to  the  plan 
announced  by  Dr.  Karl  HelfPerich,  Minister  of  Finance, 

183 


WAR  COSTS  AND  THEIR  FINANCING 


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184 


LOANS  IN  EUROPE 


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185 


WAR  COSTS  AND  THEIR  FINANCING 

taxes  were  not  to  be  imposed  during  the  period  of  the 
war.  They  would  not  only  be  burdensome,  but  they 
would  be  unnecessary,  for  the  German  financial  policy 
was  based  upon  the  assumption  of  a  speedy  victory  and 
the  collection  of  an  enormous  indemnity  from  the  con- 
quered peoples.  In  the  Reichstag  on  March  10,  1915, 
Dr.  Helff ericli  proclaimed  his  financial  policy  as  follows : 

The  means  of  financing  a  modern  war  are  substantially  the 
following:  first,  the  issue  of  loans;  second,  the  use  of  the 
printing  press  for  the  issue  of  paper  money;  third,  a  reduc- 
tion of  expenses,  and  war  taxation. 

The  main  dependence  of  the  German  Government  was 
on  the  first  tw^o.  War  taxation  was  not  resorted  to  dur- 
ing the  first  year  and  a  half  of  the  war  because,  as  Dr. 
Helff erich  said,  "  we  have  a  firm  hope  that  after  the 
conclusion  of  peace  we  shall  present  to  our  opponents  a 
bill  for  the  expenses  of  the  war  forced  upon  us."  This 
theory  of  war  finance  was  further  elaborated  in  his 
budget  speech  of  August  20,  1915,  from  which  the  fol- 
lowing significant  sentences  are  taken: 

I  explained  in  March  the  reason  which  determined  the 
united  Government  against  the  imposition  of  war  taxation 
during  the  period  of  the  war.  These  reasons  still  stand.  We 
do  not  desire  to  increase  by  taxation  the  heavy  burden  which 
war  casts  on  our  people  so  long  as  it  is  not  absolutely 
necessary.  .  .  .  As  things  are,  the  only  method  seems  to 
be  to  leave  the  settlement  of  the  war  bill  to  the  conclusion  of 
peace,  and  the  time  after  peace  has  been  concluded.  And  on 
this  I  would  say:  If  God  grant  us  victory  and  with  it  the 
possibility  of  moukling  the  peace  to  suit  our  needs,  we  neither 
can  nor  will  forget  the  question  of  costs.  We  owe  that  to 
the  future  of  our  people.  The  whole  course  of  the  future 
development  of  their  lives  must,  if  at  all  possible,  be  freed 

186 


LOANS  IN  EUROPE 

from  the  aj^palling  burden  caused  by  the  war.  Those  who 
provoked  the  war,  and  not  we,  deserve  to  drag  through  the 
centuries  to  come  the  leaden  weight  of  these  milliards.  .  .  . 
Moreover,  all  the  country's  expenditure  on  the  war,  with 
trifling  excejDtion,  has  remained  in  the  country;  it  has  gone 
to  our  soldiers,  our  agi'ieulture,  industry,  undertakings,  and 
workmen;  it  has  sei-ved  as  pajniient  to  the  last  loan,  and  so 
gone  to  create  new  capital,  the  result  of  saving. 

There  is  involved  in  the  last  sentence  the  fallacy  that 
if  the  money  is  only  spent  at  home,  it  does  not  matter 
how  great  the  debt  may  be.  This  theory  dates  back  to 
the  seventeenth  century.  It  has  been  disproved  by 
innumerable  waiters  from  the  time  of  Hume  to  the 
present,  but  it  seems  to  have  lived  on  in  Germany  and 
to  have  influenced  the  financial  policy  of  the  war. 

The  first  needs  of  the  Government  were  met  by  the 
issue  of  Treasury  bills  which  were  discounted  by  the 
Reiehsbank.  For  the  first  two  months  the  war  was 
financed  with  money  obtained  from  the  war  chest  or 
from  the  Reiehsbank.  By  the  middle  of  September, 
1914,  however,  the  floating  debt  had  become  uncom- 
fortably large,  and  it  was  funded  by  the  issue  of  a  loan. 
This  was  done  in  pursuance  of  a  carefully  devised  policy 
for  financing  the  war  by  means  of  the  issue  of  short- 
term  Treasury  bills  and  other  obligations  and  then  fund- 
ing these  at  half-year  intervals  into  long-term  bonds. 
Every  six  months  from  the  beginning  of  the  war  the 
German  Treasury  regularly  issued  a  popular  loan  in 
September  and  March.  Details  concerning  the  war  loans 
were  published  in  great  fullness  and  probably  may  be 
accepted  as  accurate,  although  no  allowance  was  made  in 
the  gross  yields  of  the  loans  for  funding  of  Treasury 
bills  or  other  short-term  obligations.  The  table  on  page 
188  shows  the  nine  war  loans  issued  during  the  war. 

187 


WAR  COSTS  AND  THEIR  FINANCING 


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188 


LOANS  IN  EUROPE 

The  first  war  loan  was  unquestionably  a  success  and 
measured  the  war  spirit  of  the  German  people.  Dr. 
Helfferich  declared  that  the  amount  subscribed,  which 
was  $1,220,250,000,  was  twice  as  large  as  had  been 
expected,  and  that  the  proceeds  would  meet  the  needs 
of  the  Government  to  the  end  of  the  fiscal  year  1915.  But 
war  expenditures  were  increasing  so  rapidly  that  after 
paying  off  part  of  the  outstanding  Treasury  bills  the 
proceeds  lasted  only  until  December,  1914,  when  the 
Government  was  forced  to  resort  to  a  new  issue  of 
Treasury  notes.  Although  a  considerable  part  of  this 
loan  was  taken  by  banks,  corporations,  and  State  insur- 
ance organizations,  there  was  also  a  large  number  of 
subscriptions  from  small  investors.  The  participation 
in  the  loan  had  been  provided  for  and  facilitated  by 
the  creation  of  "  loan  offices  "  which  were  authorized 
to  make  loans  on  securities  and  even  merchandise  that 
would  not  be  acepted  as  collateral  by  commercial  banks. 
The  following  quotation  from  a  leading  German  news- 
paper, Avliich  may  be  regarded  as  a  semi-official  spokes- 
man for  the  Government,  explained  on  the  occasion  of 
the  third  loan  hoAv  this  could  be  done:^ 

It  is  not  necessary  that  one  should  have  actual  gold  or 
silver,  and  anyone  possessing  anything  can  participate, 
whether  they  have  ready  cash  or  not.  If  you.  have  money 
in  the  bank,  simply  withdraw  it  for  the  purpose  of 
subscribing.     ... 

If  you  hold  securities  you  Avill  find  it  easier  still  to  raise 
money.  It  is  not  necessary  to  sell  them;  you  simply  borrow 
money  against  them  at  any  ''  Reichs-Darlehenskasse  "  or  at 
any  large  bank.  And  as  you  will  receive  almost  as  much 
interest  on  the  war-loan  stock,  or  even  more  interest  than 
you  pay  to  the  lending  bank,  you  Avill  be  nothing  out  of 
pocket.      You   must,    however,    hand    over   to   the   bank    the 

^  Eolnische  Zeitung,  Sept.  2,  1915. 

189 


WAR  COSTS  AND  THEIR  FINANCING 

securities  against  which  the  money  is  advanced  to  you  and 
the  bank  Avill  retain  them  until  the  loan  is  repaid.  No  loss 
can  ensue  from  the  above  mentioned  procedure.  Or  at  the  most 
it  could  only  be  one-quarter  per  cent,  per  annum  in  the  inter- 
est, if,  as  is  the  case  with  the  Beiclis-Darlehenskassen,  you  pay 
514  per  cent,  on  the  borrowed  money  whilst  you  receive 
five  per  cent,  on  the  war-loan  stock  and  even  this  possible 
loss  will  subsequently  be  made  good  in  view  of  the  fact  that 
3'ou  i^ay  only  99  marks  for  each  100  marks  of  war-loan  stock 
for  which  100  marks  will  be  repaid  in  full.     .    .    . 

If  you  have  already  subscribed  to  the  first  or  second  war 
loan  and  paid  in  full  for  the  same,  you  can  at  once  partici- 
pate in  the  present  issue.  All  you  need  to  do  is  take  your 
stock  —  or,  if  you  have  not  yet  received  the  stock,  the  receipt 
for  the  amount  paid  —  to  a  bank,  which  will  advance  to  you 
75  per  cent,  of  the  nominal  value,  so  that  if  you  have  400 
marks  old  war  loan,  3'ou  can  subscribe  300  marks  in  the  new 
issue  without  paying  a  single  pfennig.  You  can  even  sub- 
scribe four  times  this  amount,  i.  e.,  1,200  marks,  if  you  will 
also  leave  with  the  bank  the  stock  that  you  take  in  the  new 
loan,  in  which  case  you  will  have  given  the  bank  as  security 
400  marks  of  old  war  loan  and  1,200  marks  of  the  new 
war  loan,  together  1,G00  marks,  against  a  loan  of  1,200  marks. 

There  is  here  explained  in  remarkably  clear,  untecli- 
nieal  language  a  system  of  pyramiding.  By  this 
arrangement  an  initial  investment  of  10,000  marks  based 
in  the  first  instance  on  the  hypothecation  with  a  loan 
office  of  possibly  unmarketable  securities,  would  enable 
a  total  subscription  to  the  nine  war  loans  of  36,997 
marks  with  no  additional  cash  payment.  If,  as  has 
been  abundantly  proved  by  the  course  of  events,  a  war 
can  be  paid  for  only  by  the  increased  production  or  the 
saving  and  self-denial  of  the  people,  it  is  difficult  to  see 
how  such  a  policy  as  that  just  described  could  lead  to 
anything  except  inflation  and  self-stultification.  It  was 
a  case  of  endeavoring  to  lift  one's  self  by  one's  OM^n 
boot  straps.    The  power  of  the  German  Government  and 

190 


LOANS  IN  EUROPE 

the  blockade  of  the  Allies  forced  the  German  people  to 
practice  economy  and  to  finance  the  war  out  of  their 
past  accumulations  and  current  production.  But  the 
theory  of  war  finance  here  outlined  made  no  appeal 
to  the  citizen  to  curtail  nonessential  consumption  or 
to  save  the  sums  necessary  to  invest  in  war  loans  —  in 
fact,  every  effort  was  made  to  avoid  reference  to  such  an 
unpleasant  necessity.  It  took  some  time  for  the  peoples 
of  the  various  belligerent  countries  to  realize  that  the 
only  effective  subscriptions  to  war  loans  were  those  paid 
for  out  of  savings  and  not  those  financed  by  the  easy 
method  of  borrowing  at  a  bank.  But  in  Germany  the 
opposite  theory  was  officially  promulgated  and  reli- 
giously followed.  The  increasing  yield  of  the  successive 
war  loans  thus  becomes  a  measure,  not  of  the  effective 
support  of  the  war  in  terms  of  commodities  and  service, 
but  rather  a  measure  of  the  progress  of  inflation  and  of 
success  in  pyramiding. 

No  change  was  made  in  the  fiscal  policy  of  the  German 
Government  in  the  year  1916.°  War  expenditures  were 
still  to  be  met  by  means  of  loans.  The  inflation  of  the 
currency  still  continued,  and  although  new  taxation  was 
introduced,  it  was  not  sufficient  to  meet  even  the  interest 
on  the  new  war  debt.  The  easy  method  of  financing  the 
war  by  means  of  borrowing  and  the  use  of  the  printing 
press,  however,  was  by  now  showing  some  of  its  bad 

•Not  only  was  no  change  made,  but  adherence  to  the  exclusive 
loan  policy  was  thus  made  the  occasion  of  congratulation  to  the 
country  by  Dr.  Helfferich : 

"  Germany  is  the  only  belligerent  power  which  has  covered  her 
total  war  expenditure  by  long-term  loans.  That  a  nation  of 
70.000,000,  out  off  from  the  outer  world  Ity  arbitrary  acts  in  con- 
flict with  international  law.  should  have  borne  for  20  months  the 
heavy  burden  of  the  war,  and  shovild  now  again  be  offering  to  the 
F:ithcrland  more  than  10.000,000.000  marks,  is  proof  of  greatness 
bevond  praise  of  words."  (Quoted  in  the  Independent,  April  17, 
1916,  p.  100.) 

191 


WAR  COSTS  AND  TPIEIR  FINANCING 

effects.  Whatever  might  have  been  urged  in  its  favor 
as  a  scientific  policy  for  a  short  and  victorious  war  lost 
its  force  as  the  war  lengthened  and  the  debt  piled  up. 
The  costs  of  the  war,  moreover,  were  growing  steadily. 
Whereas  the  monthly  costs  had  been  estimated  at 
$500,000,000  in  1916,  they  had  risen  by  the  end  of  1917 
to  $750,000,000. 

The  year  1917  marked  a  new  departure  in  the  case 
of  the  Treasury  bills  that  were  offered  for  sale.  These 
were  made  redeemable  by  drawings  at  110,  which  was  a 
high  premium  to  pay  the  subscriber.  The  Imperial 
loans  were  issued  at  practically  the  same  price  in  all  the 
nine  issues  and  bore  the  fixed  rate  of  interest  of  five 
per  cent.  It  was  a  matter  of  considerable  self-glorifica- 
tion on  the  part  of  German  writers  that  they  were  able 
to  sell  successive  issues  of  war  bonds  practically  at  par 
without  resorting  to  higher  rates  of  interest,  as  in  the 
case  of  Great  Britain,  or  to  reduction  in  price,  as  in  the 
case  of  France.  The  real  explanation  of  Germany's 
apparent  ability  to  maintain  her  credit  unaffected  by 
the  vast  loans  she  made  is  to  be  found  in  the  methods 
pursued  to  induce  people  to  purchase  bonds  with  the 
proceeds  of  bank  loans.  As  money  could  be  easily  bor- 
rowed, not  only  from  commercial  banks  but  also  from 
the  loan  offices  especially  established  for  this  purpose, 
and  upon  every  conceivable  form  of  security,  no  one 
could  offer  the  excuse  of  inability  to  buy.  Add  to  this 
the  social  and  governmental  pressure,  amounting  in  the 
case  of  the  later  loans  to  practical  compulsion,  and  the 
flotation  of  successive  loans  at  nearly  par  is  suffi- 
ciently explained.  The  deception  practiced  upon  the 
mass  of  the  people  as  a  result  of  the  inflationist  policy 
may  have  served  to  maintain  the  ruling  class  in  power 
a  little  longer  than  would  otherwise  have  been  possible, 

192 


LOANS  IN  EUROPE 

but  it  was  a  terribly  expensive  way  to  secure  a  short 
reprieve. 

By  August  1,  1017,  after  three  years  of  war,  the 
Imperial  debt  had  passed  the  limit  of  $25,000,000,000 
which  Rudolph  Havenstein,  the  President  of  the  Reichs- 
bank,  thought  was  all  that  Germany  could  stand  and 
which  he  was  sure  would  never  be  reached.  If  this 
figure  be  compared  with  the  modest  debt  of  the  Empire 
before  the  war,  $1,250,000,000,  some  measure  of  the 
financial  burden  thus  far  imposed  upon  the  Empire  can 
be  realized ;  and  even  this  figure,  large  as  it  is,  does  not 
take  into  account  the  large  and  growing  debts  of  the 
several  states  and  of  the  municipalities. 

The  year  1918  saw  no  change  in  the  fiscal  war  policy. 
Loans  and  the  issue  of  notes  still  formed  the  chief 
dependence  of  the  Treasury,  little  additional  use  being 
made  of  taxation ;  in  fact,  the  costs  were  growing  so 
rapidly  that  the  financial  situation  was  by  this  time 
quite  out  of  hand.  By  March,  1918,  the  monthly  war 
cost  had  risen  to  $937,500,000.  The  desperate  drive  of 
the  spring  on  the  western  front  undoubtedly  brought 
the  average  for  the  next  few  months  beyond  the 
$1,000,000,000  mark.  The  impending  collapse  of  Ger- 
many was  indicated  by  the  falling  off  of  both  the  total 
amount  subscribed  and  the  number  of  subscribers  to 
the  ninth  war  loan,  which  was  issued  in  September, 
1918.  Both  of  these  factors  had  shown,  on  the  whole, 
a  fairly  steady  progression  in  the  first  eight  loans, 
althovigh  there  were  some  fluctuations.  But  the  ninth 
war  loan  recorded  a  tremendous  fall  from  the  previous 
high  record,  particularly  in  the  number  of  subscribers. 
This  ended  the  loan  policy  of  the  war. 

Germany's  war  borrowings  may  be  summarized  as 
far    as    disclosed    in    the    table    on    page    188.      The 

193 


WAR  COSTS  AND  THEIR  FINANCING 

Total  Borrowing  in  Germany,  1914-1918,  as  Disclosed  by  the 
Imperial  Government 

Nine  war  loans    $24,640,419,925 

Treasury  bills  furnished  Turkey,  Bulgaria,  etc...       1,500.000,000 

Treasury  bills  discounted  at  Reichsbank 6,776.700.000 

Loans  in  the  United  States 10.000.000 

Total $32,927,119,925 

effectual  concealment  of  the  true  state  of  affairs  in 
German  finance  is  indicated  by  the  later  startling 
disclosure  of  the  existence  of  a  floating  debt  of  $18,000,- 
000,000,  instead  of  the  $8,277,000,000  set  down  in  the 
above  table.  That  such  an  enormous  debt  of  this  char- 
acter should  have  accumulated  is  the  strongest  possible 
indictment  of  the  loan  policy  pursued  by  Germany.  In 
spite  of  the  vaunted  success  of  the  popular  loans  it  is 
now  clear  that  they  produced  less  than  60  per  cent,  of 
the  amount  needed.  As  no  resort  was  made  to  taxation 
during  the  war  for  meeting  the  costs  of  the  war,  when 
the  loans  failed  the  Government  was  forced  to  issue 
Treasury  bills.  That  it  should  have  been  considered 
necessary  to  conceal  the  existence  of  this  floating  debt 
simply  affords  additional  evidence  of  the  utter  break- 
down of  Germany's  loan  policy. 

In  view  of  this  disclosure  it  becomes  necessary  to 
construct  a  new  table  of  war  borrowings  of  Germany: 

Total    Borrowing    in    Germany,     1914-1918,    Inclxjding    True 
Floating  Debt 

Nine  war  loans    $24,640,000,000 

Floating  debt   18,000,000,000 

Loan  in  the  United  States 10.000,000 


Total $42,650,000,000 

The  loans  made  by  Austria-Hungary  followed  a  pre- 
arranged plan,  as  did  those  of  Germany.     They  were 

194 


LOANS  IN  EUROPE 

issuri^d  at  half-year  intervals  every  November  and  May, 
following  the  German  loans  at  an  interval  of  about  two 
months.  As  in  Germany  loans  constituted  the  main 
dependence  for  meeting  the  cost  of  the  war.  In  dis- 
tinction from  the  German  policy,  however,  the  proceeds 
of  the  loans  were  not  used  primarily  to  repay  any  part 
of  the  advances  of  the  Imperial  Austro-Hungarian 
Bank  or  to  fund  the  outstanding  Treasury  bills,  but 
were  also  applied  to  the  payment  of  contractors  and 
other  needs,  while  the  floating  debt  was  renewed.  This 
was  the  practice  at  least  during  the  early  part  of  the 
war.  In  floating  their  loans  the  Austrian  and  Hun- 
garian Governments  relied,  as  they  had  done  in  times 
of  peace,  exclusively  upon  bank  consortiums.  The  war 
loans  in  these  countries  were  never  so  truly  popular  as 
they  were  in  other  countries,  if  we  may  judge  by  the 
number  of  subscriptions.  In  a  large  part  the  issues  must 
have  remained  in  the  possession  of  the  banks  themselves. 

Although  the  results  of  the  war  loans  were  published 
in  considerable  detail  by  the  Government  on  the  occasion 
of  each  flotation,  no  allowance  was  ever  made  for  the 
conversion  of  outstanding  short  time  obligations.  As 
these  were  received  in  partial  payment  of  the  loans,  how- 
ever, some  allowance  must  be  made  for  this  factor, 
although  it  is  impossible  to  give  exact  figures.  The 
totals,  therefore,  are  somewhat  misleading.  In  most  of 
the  other  nations  the  amount  of  ''  fresh  money  " 
obtained  was  stated;  not  so  in  Austria-Hungary.  The 
table  on  pages  196  and  197  shows  the  amounts  of  the 
various  issues  with  the  rates  of  interest,  issue  prices,  and 
dates  of  maturities. 

The  other  Teutonic  allies,  Turkey  and  Bulgaria,  fol- 
lowed only  too  willingly  the  example  of  their  master. 
Loans  were  floated  by  both  countries  both  at  home  and 

195 


WAR  COSTS  AND  THEIR  FINANCING 


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WAR  COSTS  AND  THEIR  FINANCING 

abroad,  and  paper  money  was  freely  issued,  but  the 
main  source  of  supply  of  both  the  Turkish  and  Bulgarian 
treasuries  was  the  German  Government  by  which  the 
war  in  both  countries  was  largely  financed.  So  far  as  a 
policy  can  be  discerned  in  the  case  of  these  two  coun- 
tries it  was  distinctly  a  loan  policy. 


CHAPTER  VII 

LOANS   IN   THE    UNITED    STATES 

War-finance  ])rof;iam  of  the  United.  States  —  The  First  Liberty 
loan  —  The  Second  Liberty  loan  —  The  Third  Liberty  loan  — 
The  Fourth  Liberty  loan  —  The  Victory  Liberty  loan  —  War 
savings  and  tlirift  stamps  —  Advances  to  the  Allies. 

During  the  33  months  between  the  outbreak  of  the 
■war  in  Europe  and  the  entrance  of  the  United  States 
the  industries  of  this  country  were  to  a  considerable 
extent  adjusted  to  supplying  the  war  needs  of  the 
belligerents.  Manufactures,  agriculture,  mining,  and 
other  branches  of  industry  had  shown  a  tremendous 
expansion;  gold  flowed  into  the  country;  foreign-owned 
securities  were  returned  and  absorbed;  trade  balances 
piled  up  in  favor  of  the  United  States  in  foreign  and 
neutral  countries;  shipping  made  an  advance  greater 
than  that  of  the  previous  generation.  Profits  had 
doubled,  tripled,  and  quadrupled ;  steel,  $19  a  ton  before 
the  war,  had  gone  to  $44;  from  $9  a  ton  southern  pig 
iron  rose  to  $17 ;  copper  went  from  11  cents  to  44  cents 
a  pound;  flax  soared  from  $400  to  $1,300  a  ton;  and 
many  other  commodities  reached  unprecedented  price 
levels. 

The  admonition  of  the  Administration  to  the  banks  at 
the  end  of  1916  not  to  overload  with  non-liquid  foreign 
Treasury  bills  sounded  a  note  of  warning,  and  the 
financial  institutions  began  to  put  their  houses  in  order. 
The  loans  of  the  Federal  reserve  banks  were  reduced 
from  $222,000,000  at  the  beginning  of  the  year  1917  to 
$168,000,000  at  the  time  of  our  entrance  into  the  war. 

199 


WAR  COSTS  AND  THEIR  FINANCING 


Large  numbers  of  Federal  reserve  notes  were  printed 
and  distributed  to  the  subtreasuries  throughout  the  coun- 
try, so  that  they  would  be  readily  available  in  the  event 
of  need.  When  war  was  declared  on  April  6,  1917,  the 
banking  system  of  the  United  States  was  in  the  strongest 
possible  condition.  The  production  of  the  country  had 
reached  the  highest  point  ever  attained ;  the  gold  supply 
was  the  greatest  in  the  history  of  the  nation.  The 
United  States  was  now  a  creditor  instead  of  a  debtor 
nation,  and  the  foreign  loans  made  by  its  citizens  to 
belligerents  amounted  to  over  $2,912,000,000.  The  posi- 
tion of  the  Treasury  was  also  strong.  The  tax  legislation 
of  the  past  three  or  four  years  had  provided  it  with 
machinery  that  permitted  an  easy  and  prompt  expan- 
sion of  revenue.  The  Government  debt  was  small,  its 
credit  stood  at  a  high  point,  and  Government  expendi- 
tures had  remained  practically  stationary. 

In  spite  of  all  this,  however,  the  world-wide  inflation 
and  high  prices  which  now  prevailed  created  problems 
of  war  finance  for  the  United  States  in  1917  that  had 
not  presented  themselves  to  the  other  belligerents  in 
1914.  During  this  interval  there  had  been  a  serious 
fall  in  the  purchasing  power  of  the  dollar.  This  is 
clearly  shown  by  the  changes  in  the  following  index 
numbers : 

Increases  in  Index  Numbers,  1914—1917 


Authority 


London  Statist 

London  Economist 

Bradstreet 

U.  S.  Bureau  of  Labor,  wholesale  prices 
U.  S.  Bureau  of  Labor,  retail  prices. .  .  . 

200 


July,  1914 


100 
100 
100 
100 
100 


April,  1917 


213.0 
210.8 
174.5 
172.7 
142.0 


LOANS  IN  THE  UNITED  STATES 

It  was  necessary  for  the  United  States  to  ent^er  upon 
its  war-finance  program  on  the  highest  pinnacle  of 
prices  and  on  a  rising  commodity  and  labor  market. 
The  same  measure  of  achievement,  which  in  1914  would 
have  cost  $10,000,000,000,  in  1917  called  for  practically 
twice  that  amount.  On  the  other  hand,  the  United  States 
had  the  benefi^t  of  the  three  years'  experience  of  the  dif- 
ferent European  exchequeus;  their  mistakes  we  could 
avoid  and  from  them  we  borrowed  ideas  freely,  adapting 
to  our  peculiar  needs  the  ways  and  means  worked  out  by 
them  sometimes  at  great  cost.  Advantage  was  taken  of 
Great  Britain's  costly  experience  in  handling  the  con- 
scription problem,  especially  with  respect  to  the  system 
of  deferred  classification.  So,  too,  in  the  framing  of 
revenue  legislation  the  curtailment  of  credits  for  non- 
essential industries,  the  rationing  program,  the  issue 
of  war  savings  certificates,  and  the  insistence  upon 
national  thrift  —  these  and  many  other  lessons  were 
learned  from  Europe's  experience.  The  war  had  de- 
veloped by  this  time  to  a  point  at  which  the  necessary 
machinery  of  finance  was  definitely  established.  The 
best  financial  methods  had  been  tested  out,  and  the 
necessity  of  a  complete  mobilization  of  all  the  economic 
forces  of  the  nation  was  realized. 

The  war-finance  program  of  the  United  States  was 
definite  and  well  conceived.  Heavy  taxes  were  to  be 
imposed  at  once,  and  the  difference  between  tax  revenue 
and  the  cost  of  the  war  was  to  be  raised  by  loans.  The 
end  of  the  fiscal  year  on  June  30,  1917,  disclosed  that 
about  one-third  of  the  war  expenditures  had  been  met 
out  of  revenue  and  the  other  two-thirds  out  of  loans, 
and  this  ratio  was  adopted  by  the  Secretary  of  the 
Treasury  the  following  year  as  the  principle  that  should 
govern  the  distribution  of  the  burden  between  the  two. 

201 


WAR  COSTS  AND  THEIR  FINANCING 

Tliis  theory  was  clearly  stated  in  a  letter  written  by 
J\Ir,  McAdoo  to  Claude  Kitchin,  Chairman  of  the  Ways 
and  Means  Committee  of  the  House,  on  June  5,  1918:^ 

In  the  fiscal  year  ending  June  30,  1918,  our  cash  disburse- 
ments will  amount  to  between  $12,500,000,000  and  $13,000,- 
000,000.  Of  tliis  amount  about  one-third  will  have  been 
raised  by  taxes  and  two-thirds  by  loans,  all  of  which  will  be 
rej^resented  by  long-time  obligations  —  that  is,  bonds  of  the 
first,  second,  and  third  Liberty  loans  and  war  savings  cei'tifi- 
cates.  We  shall  thus  have  completed  fifteen  months  of  the 
war  with  a  financial  record  unequaled,  I  believe,  by  any 
other  nation.     .     .     . 

If  I  may,  without  impropriety,  offer  a  suggestion  as  to 
the  i:)roposed  revenue  measure,  I  should  recommend : 

(1)  That  one-third  of  the  cash  expenditures  to  be  made 
during  the  fiscal  year  ending  June  30,  1919,  be  provided  by 
taxation.  According  to  my  estimates,  this  would  involve 
raising  eight  billion  dollars  through  taxation. 

(2)  That  a  real  war-]3rofits  tax  at  a  high  rate  be  levied 
on  all  war  profits.    .    .     . 

(3)  That  there  should  be  a  substantial  increase  in  the 
amount  of  normal  income  tax  upon  so-called  unearned 
incomes.     .     .     . 

(4)  That  heavy  taxation  be  imposed  ujion  all  .uxuries. 

To  secure  the  necessary  loans  the  Treasury  at  the 
beginning  adopted  a  method  which  later  hardened  into 
a  definite  policy.  This  was  the  issuance  by  the  Treasury 
of  short  term  certificates  of  indebtedness  which  were 
issued  in  anticipation  of  the  long  term  loans  and  later 
of  tax  payments,  and  their  subsequent  funding  by  the 
flotation  of  long-term  loans.  The  transactions  in  certifi- 
cates of  indebtedness  during  the  period  of  the  war 
are  recorded  in  the  table  on  pages  204  and  205.     The 

*  Annual  report  of  the  Secretary  of  the  Treasurv.  1918.  pp. 
47,  49. 

202 


LOANS  IN  THE  UNITED  STATES 

Treasury  placed  these  certificates  through  the  12 
Federal  Reserve  Banks,  which  acted  as  its  fiscal 
agents  and  which  undertook  the  marketing  of  the 
5  loans.  The  general  plan  was  for  the  Treasury 
to  notify  the  banks  in  advance  of  the  amounts  it 
would  require,  and  the  necessary  percentage  of 
resources  was  then  set  aside  by  the  banks  to  take 
up  the  Treasury  certificates.  These  when  issued 
were  allotted  in  quotas  to  the  respective  banks,  the 
quotas  being  based  upon  the  total  resources  of  the  banks 
in  the  system  in  the  different  districts.  The  amounts 
accruing  from  the  sale  of  these  certificates  were  placed 
to  the  credit  of  the  Government  in  the  purchasing  banks, 
and  the  Government  in  turn  desighated  these  same 
banks  as  its  depositaries,  drawing  on  its  credit  as  need 
arose  for  the  payment  of  wages,  supply  bills,  and  other 
expenditures.  As  the  Government  warrants  were  in 
turn  deposited,  frequently  in  the  same  banks,  there  was 
involved  in  this  method  only  a  transfer  of  credits. 
When  the  proceeds  of  the  Liberty  Loans  were  paid  in, 
the  outstanding  certificates  were  liquidated  and  addi- 
tional credits  in  favor  of  the  Government  were  estab- 
lished. In  this  way  the  process  of  financing  the  war 
was  distributed  over  the  whole  financial  system,  certifi- 
cates being  gradually  placed,  credits  being  gradually 
absorbed,  and  as  funds  to  meet  loan  subscrii^tions  came 
in,  outstanding  certificates  being  cancelled  and  surren- 
dered. Transactions  involving  the  turnover  of  billions 
of  dollars  were  thus  carried  through  with  a  minimum  of 
friction  and  of  disorganization  of  the  money  market. 

Although  this  method  of  certificate  borrowing  enabled 
the  Treasury  to  secure  the  needed  funds  without  business 
derangement,  it  undoubtedly  exercised  an  unfortunate 
influence  by  tending  toward  inflation.     As  carried  out 

203 


WAR  COSTS  AND  THEIR  FINANCING 


Certificates  of  Indebtedness  Issued  by  the  Treasury 
Department,  1917-1919 


Date 

Maturity 

Inter- 
est, per 
cent. 

Amount 
of  issue 

Total 

Anticipating 

First  Loan: 

1917:  April  25 

June  30 

3 

$268,205,000 

May  10 

July  17 

3 

200,000,000 

May  25 

July  30 

3i 

200,000,000 

June    8 

July  30 

3i 

200,000,000 

$868,205,000 

Anticipating 

Second  Loan: 

1917:  Aug.    9 

Nov.  15 

3^ 

300,000,000 

Aug.  28 

Nov.  30 

3^ 

250,000,000 

Sept.  17 

Dec.  15 

3i 

300,000,000 

Sept.  26 

Dec.  15 

4 

400,000,000 

Oct.    18 

Nov.  26 

4 

385,197,000 

Oct.   24 

Dec.  15 

4 

685,296,000 

2,320,493,000 

Anticipating 

Third  Loan: 

1918:  Jan.   22 

April  22 

4 

400,000,000 

Feb.     8 

May    9 

4 

500,000,000 

Feb.  27 

May  28 

4i 

500,000,000 

Mar.  20 

June  18 

4i 

543,032,500 

April  10 

July    9 

4i 

551,226,500 

April  22 

July  18 

4| 

517,826,500 

3,012,085,500 

Fourth  Loan: 

1918:  June  25 

Oct.  24 

4§ 

$839,646,500 

July     9 

Nov.    7 

^ 

753,938,000 

July  23 

Nov.  21 

^ 

584,750,500 

Aug.    6 

Dec.    5 

41 

575,706,500 

Sept.    3 

Jan.     2,  1919 

41 

639,493,000 

Sept.  17 

Jan.  16 

^ 

625,216,500 

Oct.     1 

Jan.  30 

4§ 

641,069,000 

4,659,820,000 

Anticipating 

Fifth  Loan: 

1918:  Dec.     5 

41 

$613,438,000 

Dec.    9 

41 

572,494,000 

1919:  Jan.     2 

4f 

751,684,500 

204 


LOANS  IN  THE  UNITED  STATES 


Ceetificates  of  Indebtedness— Con<in!tc(i 


Date 


Maturity 


Jan. 

16 

Jan. 

30 

Feb. 

13 

Feb. 

27 

Mar. 

13 

April  10 

May 

1 

4§ 

4i 

4^ 


Inter- 
est, per 
cent. 


Amount 
of  issue 


600,101,500 
687,381,500 
620,578,500 
532,381,500 
542,197,000 
646,025,000 
591,308,000 


In  anticipation  of  income  and  profits  taxes,  1918. . . 
In  anticipation  of  income  and  profits  taxes,  1919. .  . 

To  secure  Federal  reserve  bank  notes 

Special  issues 


Total. 


Total 


6,157,589,500 
1,624,403,500 
3,354,787,500 
255,475,000 
7,733,635,903 


.«;29,986,494,903 


in  practice,  the  certificates  taken  by  the  banks  were  paid 
for  largely  by  the  creation  of  credit  Government 
deposits.  Since  no  reserves  must  legally  be  held  by  the 
banks  against  such  Government  deposits,  the  restraint 
upon  credit  inflation  ordinarily  imposed  by  this  require- 
ment was  lacking.  It  would  be  going  too  far  to  attribute 
to  the  Treasury  system  of  anticipatory  borrowing^  an 
inflation  which  took  place  as  a  result  of  a  tremendous 
expansion  of  business  and  of  Government  expenditures 
far  in  excess  of  the  savings  of  the  people.  But  there 
was  a  real  inflation  of  the  credit  currency  of  the  country 
beyond  monetary  needs,  with  a  consequent  harmful 
effect  upon  prices. 

^  For  a  severe  criticism  of  this  policy  soe  J.  H.  Hollnnder, 
War  Borrowing :  A  I'^tiidy  of  Treasury  Certificates  of  Indebted- 
ness of  the  United  States  (New  York,  1919),  ch.  v. 

205 


WAR  COSTS  AND  THEIR  FINANCING 

The  marketing  of  the  war  loans,  as  already  noted,  was 
also  handled  through  the  12  Federal  Reserve  Banks,  and 
here  also  the  same  method  of  allotting  quotas  based  upon 
banking  resources  was  followed.  A  highly  perfected 
selling  organization  was  created  in  each  district,  which 
took  subscriptions  in  three-  or  four-weeks  drives  and 
endeavored  to  place  with  the  general  public  the  bonds 
allotted  to  the  district.  There  were  few  cases  where 
failure  of  the  people  to  subscribe  their  full  quota  was 
registered,  and  every  loan  was  oversubscribed.  The 
banks  acted  as  fiscal  agents  for  the  Government,  receiv- 
ing payments  and  distributing  the  bonds  when  paid  for. 

Advances  to  allies  in  a  total  amount  of  $10,000,000,- 
000  were  authorized  by  the  first  four  Liberty  Loan  Acts. 
This  was  a  new  departure  in  United  States  Government 
finance  and  attracted  unusual  attention.  The  machinery 
by  which  it  was  carried  through  had  consequently  to  be 
devised  to  meet  the  requirements,  and  was  the  result  of 
much  careful  study.  The  Secretary  of  the  Treasury 
was  authorized  to  establish  credits  in  favor  of  allied 
Governments  and  to  the  extent  of  the  credits  so  estab- 
lished to  purchase  at  par  their  obligations,  which  should 
bear  the  same  rate  of  interest  and  contain  in  essentials 
the  same  terms  and  conditions  as  the  L^'nited  States 
bonds  issued  for  this  purpose.  Short  term  or  demand 
certificates  of  indebtedness  were  received  from  the 
foreign  Government  in  exchange  for  a  Treasury  war- 
rant of  the  United  States  for  an  equivalent  amount.  The 
sum  thus  received  from  the  Ignited  States  would  then  be 
distributed  by  the  foreign  Government  among  various 
banks,  and  the  credits  thus  established  would  be  drawn 
upon  for  the  purchase  of  supplies  as  need  arose.  In 
order  that  purchases  by  the  Allied  Governments  might 
be  made  in  the  most  efficient  manner  possible  without 

206 


LOANS  IN  THE  UNITED  STATES 

bringing  them  into  competition  with  one  another  or  with 
the  United  States  Government,  a  commission  called  the 
Inter- Allied  Purchasing  Commission  was  created  through 
which  all  purchases  by  the  Allied  Governments  in  the 
United  States  were  made.  The  interest  on  the  demand 
obligations  of  the  foreign  Governments  was  first  fixed  at 
three  per  cent,  per  annum,  but  shortly  thereafter  it  was 
increased  to  31/4  pei"  cent,  in  order  to  conform  with  the 
rate  paid  by  the  United  States  Treasury  on  its  certifi- 
cates of  indebtedness.  Subsequently  the  rate  was  raised 
to  31/0,  4I/4,  and  finally  five  per  cent. 

The  war  loans  differed  in  certain  essential  respects  in 
the  successi\'ie  issues,  but  all  the  bonds  had  several  im- 
portant features  in  common.  They  were  issued  at  par. 
All  except  those  of  the  Third  Loan  had  an  optional  date 
of  redemption  prior  to  the  date  of  maturity.  Interest 
was  payable  semi-annually.  Each  issue  provided  for 
coupon  or  registered  bonds  at  the  option  of  the  sub- 
scriber; the  coupon  bonds  were  issued  in  denominations 
from  $50  to  $10,000,  and  the  registered  bonds  in  denomi- 
nations from  $50  to  $100,000  except  in  the  case  of  the 
First  Loan,  in  whicli  the  minimum  was  $100.  Both 
principal  and  interest  were  payable  in  gold  coin  of  the 
present  standard  of  weight  and  fineness.  The  period  of 
subscription  for  each  loan  was  fixed  at  practically  four 
weeks.  Subscriptions  were  received  by  the  Treasury, 
the  subtreasuries,  the  Federal  Reserve  Banks,  the 
national  and  state  banks  and  trust  companies,  and  many 
private  banks,  firms,  corporations  and  other  organiza- 
tions. Finally,  subscriptions  were  payable,  at  the  elec- 
tion of  the  subscriber,  in  full  or  in  installments  over  a 
ten-months  period.  These  were  the  similarities.  The 
differences  between  the  various  loans  will  be  noted  in 
the  following  more  detailed  descriptions. 

207 


WAR  COSTS  AND  THEIR  FINANCING 

The  First  Liberty  Loan  Act  of  April  24,  1917,  author- 
ized a  bond  issue  of  $2,000,000,000  and  advances  to  allies 
of  $3,000,000,000.  Authority  was  also  given  tlie  Secre- 
tary of  the  Treasury  to  issue  certificates  of  indebtedness 
to  an  amount  equal  to  the  Liberty  Loan  at  not  less  than 
par,  at  a  rate  of  interest  not  exceeding  3i/^  per  cent., 
and  running  for  a  period  not  longer  than  one  year.  In 
order  to  provide  funds  to  meet  the  immediate  needs  of 
the  Government  until  the  proceeds  of  the  First  Loan 
should  become  available,  the  Secretary  of  the  Treasury 
began  at  once  the  sale  of  Treasury  certificates,  the  first 
issue  bearing  date  of  April  25,  1917.^  Between  this 
date  and  June  8  four  issuer  were  made,  aggregating 
$868,305,000,  The  maturities  of  these  early  issues  were 
limited  to  60  days. 

Subscriptions  to  the  First  Liberty  Loan  were  opened 
on  May  14,  1917,  and  closed  on  June  15,  The  bonds 
were  3i/2  per  cent.  15-30-year  bonds  dated  June  15,  1917, 
maturing  June  15,  1947,  but  redeemable  after  1932  on 
three  months'  notice.  They  were  tax-exempt  except  for 
estate  and  inheritance  taxes.  The  bonds  were  converti- 
ble into  similar  bonds  at  higher  rates  if  such  bonds 
were  issued  in  the  future.  The  amount  offered  was 
$2,000,000,000.  This  sum  was  settled  upon  by  the 
Treasury  Department  after  careful  consultation  with 
experts,  of  whom  "  many  students  of  finance  and  men 
experienced  in  large  bond  operations  believed  that  the 
first  issue  should  not  exceed  $1,000,000,000  and  some 
thought  that  the  first  loan  should  not  exceed  $500,000,- 
000."*  The  controlling  consideration,  however,  was  the 
essential  requirements  of  the  Government  and  the  neees- 

'  The  dates,  maturities,  interest  rates,  and  amounts  of  the  vari- 
ous issues  of  certificates  of  indebtedness  will  be  found  in  the 
table  on  pages  204  and  205. 

*  Report  of  the  Secretary  of  the  Treasury,   1917,  p.  6. 

208 


LOANS  IN  THE  UNITED  STATES 

sities  of  the  Allies,  which  made  a  large  sum  Imperative. 
Even  this  proved  insufficient,  however,  and  the  Treasury 
was  compelled  to  resort  again  to  the  issue  of  certifi- 
cates of  indebtedness  in  August.  Expenditures  which 
had  averaged  $05,000,000  a  month  for  the  year  prior  to 
the  war,  were  over  $750,000,000  for  August,  1917,  in- 
cluding advances  to  Allies.  Having  fallen  behind  at  the 
beginning,  the  Treasury  was  never  able  to  overtake  the 
rapidly  growing  expenditures,  but  was  forced  to  antici- 
pate each  successive  loan  by  issues  of  certificates  of 
indebtedness  in  advance  of  the  actual  flotation.  Thus, 
by  November  15,  1917,  when  the  Second  Liberty  Loan 
was  issued,  the  certificates  outstanding  amounted  to 
$2,320,493,000. 

It  was  realized  that  to  float  so  large  an  issue  as  the 
First  Loan  it  would  be  necessary  to  make  a  direct  appeal 
to  the  people,  and  a  most  effective  selling  organization 
was  built  up  for  this  purpose  which  continued' to  func- 
tion with  great  success  throughout  the  war.  The  first 
step  was  that  of  the  education  of  the  American  public 
on  the  nature  of  bonds  as  an  investment  and  on  its  duty 
to  subscribe  as  a  matter  of  patriotism.  The  bond-holding 
public  in  the  United  States  then  numbered  less  than 
350,000.  Every  city,  town,  or  village  that  boasted  a 
bank  now  developed  a  bond-selling  organization.  For 
this  purpose  the  12  Federal  Reserve  Banks,  which  are 
fiscal  agents  of  the  Government,  were  used  as  the  basis. 
Each  of  the  12  Reserve  banks  appointed  a  committee  of 
representative  business  men  to  act  as  a  central  Liberty 
Loan  committee  in  the  respective  districts,  and  they  in 
turn  appointed  subcommittees  in  each  of  the  larger 
towns  and  cities.  Extensive  publicity  and  subscription 
campaigns  were  inaugurated  and  carried  through  by 
these    committees,    which    received   the    cooperation    of 

209 


WAR  COSTS  AND  THEIR  FINANCING 

existing  organizations  and  of  new  ones  created  especially 
for  tliis  purpose.  The  American  Bankers'  Association 
offered  its  services,  and  large  numbers  of  experienced 
bond  salesmen  were  enlisted  in  the  work  of  selling  Lib- 
erty bonds. 

In  the  four-weeks  drive  which  usliered  in  the  First 
Loan,  subscriptions  amounting  to  $3,035,236,850  were 
secured  from  4,500,000  subscribers.  This  oversubscrip- 
tion of  52  per  cent,  was  unexpected,  and  as  the  Treasury 
had  announced  that  it  would  accept  only  the  amount  of 
the  loan  asked  for,  it  pro-rated  the  subscriptions,  allotting 
smaller  ones  from  $50  to  $10,000  in  full  and  the  larger 
ones  at  varying  ratios  which  ran  down  to  20  per  cent. 
on  the  largest  subscriptions.  The  First  Loan  registered 
the  attitude  of  the  American  people  toward  popular 
loans  and  gave  promise  of  larger  possibilities  for  the 
future. 

The  needs  of  the  Treasury  and  of  the  Allied  countries 
were  calling  for  enormous  sums  even  beyond  the  original 
estimates  of  the  Treasury.  The  loans  to  the  Allies  were 
averaging  about  $450,000,000  a  month,  and  by  Novem- 
ber 1,  1917,  they  had  reached  a  total  of  $2,717,200,000. 
Domestic  requirements  for  the  same  period  were  about 
$1,635,000,000,  These  sums  were  far  in  excess  of  the 
revenue  receipts,  even  supplemented  by  the  proceeds  of 
the  First  Liberty  Loan,  and  it  was  necessary  to  issue 
large  amounts  of  certificates  of  indebtedness.  By 
November  the  amount  outstanding  was  over  $2,00,000,- 
000,  and  accordingly  the  Second  Liberty  Loan  was 
authorized  to  fund  this  floating  debt  and  to  provide 
additional  capital. 

The  Second  Liberty  Loan,  authorized  by  the  Act  of 
September     24,     1917,     consisted    of    an     offering     of 

210 


LOANS  IN  THE  UNITED  STATES 

$3,000,000,000  in  four  per  cent.  10-25-year  convertible 
gold  bonds  dated  November  15,  1917,  The  great  differ- 
ence between  this  issue  and  the  preceding  one  lay  in  the 
fact  that  the  tax-exempt  feature  was  considerably 
modified.  There  was  perhaps  no  other  provision  of  the 
first  issue  that  had  called  forth  such  hostile  criticism  as 
the  exemption  of  the  bonds  from  taxation.  The  classic 
argument  in  favor  of  the  exemption  of  Federal  bonds 
from  taxation  had  always  been  that  a  tax-exempt  bond 
would  sell  at  a  higher  figure  and  thus  yield  a  larger 
return  to  the  Government.  If,  on  the  other  hand,  the 
Government  should  tax  its  own  securities,  it  would  lose 
in  the  interest  rate  or  in  the  issue  price  what  it  would 
gain  from  taxation.  In  either  case,  so  the  argument 
ran,  the  aggregate  sum  would  be  the  same,  and  there 
was  nothing  to  be  gained,  therefore,  by  subjecting  Gov- 
ernment bonds  to  taxation.  Although  this  may  be  true 
under  normal  conditions,  with  proportional  taxes,  when 
the  rate  of  taxation  remains  unchanged,  it  did  not  hold 
at  this  time  when  the  taxes  were  progressive  and  when 
the  rates  were  being  frequently  increased.  The  very 
heavy  surtaxes  on  incomes  introduced  in  the  War 
Revenue  Act  of  October,  1917,  immediately  placed  a 
premium  on  the  tax-free  bonds  of  the  first  issue.  They 
were  termed  the  "  rich  man's  bonds,"  as  they  were 
purchased  in  large  quantities  by  wealthy  persons  who 
desired  to  evade  the  income  tax  by  placing  their  invest- 
ments in  tax-free  securities.  It  has  been  estimated  by 
an  eminent  financial  authority  that  investment  in  3y> 
per  cent,  tax-exempt  Liberty  bonds  was  equal  to  a  simi- 
lar investment  in  a  taxable  security  yielding  tlie  follow- 
ing returns  :^ 

^Letter  from  Otto  11.   Kahn  in   Xctv  Rcpithlic,   June   9,    1917, 
p.  161. 

211 


WAR  COSTS  AND  THEIR  FINANCING 


5.02  per  cent. 
5.93  per  cent. 
7.07  per  cent. 
7.82  per  cent. 
cS.75  per  cent. 


in  respect  of  incomes  over  $100,000  per  annum, 

in  respect  of  incomes  over  200.000  per  annum, 

in  respect  of  incomes  over  300,000  per  annum, 

in  respect  of  incomes  over  500,000  per  annum, 

"n  respect  of  incomes  over  1.000.000  per  annum. 


9.21  per  cent,  in  respect  of  incomes  over  2,000,000  per  annum. 

The  possession  of  tax-exempt  bonds  accorded  an  advan- 
tage to  the  large-income  taxpayer  which  was  not  shared 
by  the  recipient  of  small  incomes.  But  since  the  loan 
was  purchased  by  both  income  groups,  the  price  was  not 
enhanced  by  the  full  amount  of  the  exemption  granted, 
and  consequently  the  gain  to  the  Government  from  the 
lower  interest  rate  was  not  as  great  as  the  loss  in  revenue 
from  the  income  tax.  A  change,  therefore,  was  deemed 
essential  in  the  tax-exemption  feature  in  order  that  the 
bonds  might  be  of  the  same  value,  so  far  as  taxation  was 
concerned,  to  all  investors  and  in  order  that  they  might 
make  the  widest  possible  appeal.  For  these  reasons 
the  new  bonds  were  made  subject  to  the  super-income 
taxes  and  excess-profits  taxes,  and  by  way  of  compensa- 
tion the  rate  of  interest  was  increased  to  four  per  cent. 
The  bonds  issued  under  the  Second  Liberty  Loan  Act 
were  exempted,  principal  and  interest,  from  all  taxation 
except  (1)  estate  or  inheritance  taxes  and  (2)  graduated 
super-income  taxes  and  excess-profits  and  war-profits 
taxes.  At  the  time  of  the  passage  of  the  Act  this  phras- 
ing of  the  law  was  strongly  criticized  on  the  ground 
that  these  bonds  too  would  be  tax-exempt  unless,  or 
only  so  long  as  these  Federal  taxes  should  be  retained. 
The  interest  on  $5,000  principal  in  this  issue  was  also 
exempted  during  the  life  of  the  bond  from  the  taxes 
enumerated  under  (2)  above.  The  bonds  carried  a  con- 
version privilege,  but  only  into  the  next  issue  of  higher- 
interest  war  bonds. 

The  Treasury  announced  that  it  would  allot  additional 
212 


LOANS  IN  THE  UNITED  STATES 

bonds  up  to  oue-lialf  of  any  oversubscription.  Suhscru)- 
tions  opened  on  October  1  and  closed  on  October  27. 
The  campaign,  which  was  similar  to  that  carried  on 
during  the  first  loan,  but  more  widespread  and  intense, 
resulted  in  total  subscriptions  of  $4,617,532,300  from 
9,400,000  subscribers,  this  being  54  per  cvnt.  over- 
subscription. In  accordance  with  the  announcement  of 
the  Treasury  only  50  per  cent,  of  the  oversubscription 
was  accepted,  and  the  total  amount  allotted  was 
$3,808,758,650.  All  subscriptions  between  $50  and 
$50,000  were  allotted  in  full,  and  the  larger  subscribers 
received  from  90  to  40  per  cent,  of  their  subscriptions. 
The  loan  was  in  every  respect  a  remarkable  success. 
Its  distribution  was  twice  as  wide  as  that  of  the  First 
Loan,  and  over  73  per  cent,  of  the  loan  was  paid  in  full 
on  November  15.  It  must  be  said,  however,  that  a  larger 
resort  to  borrowing  at  the  banks  for  the  purpose  of 
making  subscriptions  was  noticeable  during  the  placing 
of  this  loan  than  had  been  the  case  in  the  first.  On 
November  23,  1917,  after  the  effect  of  the  loan  was 
reflected  in  the  bank  returns,  the  Federal  Reserve  Banks 
sho\\'ed  total  holdings  for  member  banks  and  their 
clients,  as  assets  and  as  collateral,  of  $355,392,000,  which 
measured  the  credit  granted  for  the  purchase  of  war 
paper.  In  order  to  facilitate  the  operations  of  member 
banks  in  placing  the  bonds  in  the  hands  of  actual  in- 
vestors the  Federal  Reserve  Banks  established  a  rate  for 
the  rediscount  of  customers'  loans  coUateraled  by 
Government  bonds  or  Treasury  certificates  of  indebted- 
ness equal  to  the  interest  rate  on  the  bonds.  The  amount 
of  3i/<j  per  cent,  bonds  of  the  First  Liberty  Loan  con- 
verted into  four  per  cent,  bonds  was  only  $568,320,050, 
showing  that  the  exemption  from  taxation  was  regarded 
by  most  of  the  holders  as  of  greater  value  than  the 

213 


WAR  COSTS  AND  THEIR  FINANCING 

increase  in  the  interest  rate.  The  bonds  issued  upon 
conversion  retained  the  date  of  maturity,  the  terms  of 
redemption,  and  the  interest-payment  dates  of  the  8^28, 
but  otherwise  had  the  provisions  of  the  new  issue. 

During  the  next  few  months  the  rapidly  growing  costs 
of  the  war,  the  rising  labor  market,  and  the  heavy 
prospective  demands  both  for  domestic  requirements  and 
for  the  needs  of  the  Allies  all  combined  to  make  impera- 
tive the  curtailment  of  every  unnecessary  draft  on 
credit.  It  was  clear  by  this  time  that  the  slogan  ' '  busi- 
ness as  usual  "  was  both  fallacious  and  dangerous. 
Business  must  be  readjusted  to  the  war-making  function 
of  the  nation.  Monthly  expenditures,  including  ad- 
vances to  the  Allies,  were  steadily  mounting,  and 
for  April,  1918,  reached  the  then  record  total  of 
$1,215,287,119.  The  proceeds  of  the  Second  Loan  had 
long  since  been  exhausted ;  issues  of  Treasury  certificates 
in  anticipation  of  a  third  loan  had  begun  on  January  22, 
and  by  April  22  had  been  sold  to  an  amount  of 
$3,012,085,500.  In  addition  to  these,  certificates  of 
indebtedness  in  anticipation  of  the  June  taxes  were  sold 
to  the  amount  of  $1,624,403,500.  The  condition  of  the 
Treasury  and  the  approaching  maturities  of  outstanding 
certificates  of  indebtedness,  $400,000,000  of  which  fell 
due  on  April  22,  made  it  necessary  to  consider  the 
offering  of  another  Liberty  loan. 

Acting  under  authority  of  the  Act  of  April  4,  1918, 
the  Treasury  now  issued  $3,000,000,000  in  414  per  cent. 
10-year  inconvertible  gold  bonds.  In  the  issue  of  this 
Third  Liberty  Loan  the  discussion  centered  about  the 
rate  of  interest.  The  bonds  of  the  previous  loan  were 
selling  below  par,  and  the  return  on  industrial  and 
other  bonds  was  such  as  to  make  it  doubtful  in  the 

214 


LOANS  IN  THE  UNITED  STATES 

minds  of  many  whether  even  a  4i/^  per  cent.  Govern- 
ment bond  could  be  floated  at  par.  The  Treasury, 
however,  "  stood  firm  in  the  belief  that  the  rate  of 
interest  itself  would  not  maintain  bonds  at  par  in  the 
financial  market;  that  the  price  of  Liberty  bonds,  even 
though  quoted  at  less  than  par  on  the  exchanges,  would 
not  deter  the  American  people  from  buying  at  par  tho 
same  bonds  when  offered  by  their  Government  to  secure 
the  necssary  funds  to  carry  on  the  war;  that  the 
patriotism  of  the  American  people  was  not  measured  by 
interest  rates,  nor  determined  by  the  fluctuations  of 
Government  bonds  on  stock  exchanges."''  In  other 
words,  the  patriotism  of  the  American  people  was  to  be 
relied  upon  rather  than  the  investment  merits  of  the 
bonds. 

It  was  hoped  that  the  increase  in  the  interest  rate  to 
4^,4  per  cent,  would  result  in  stabilizing  the  interest 
rate  so  far  as  this  was  possible,  and  would  permit  the 
elimination  of  the  conversion  feature  which  in  itself  had 
a  tendency  to  create  a  demand  for  a  constantly  rising 
rate  of  interest  on  successive  issues.  Great  Britain  by 
her  wholesale  policy  of  conversion  had  thus  lost  all  the 
advantage  of  the  lower  interest  rates  at  which  she  had 
placed  her  earlier  issues.  The  bonds  of  the  third  issue, 
like  those  of  the  second,  were  tax-exempt  except  as  to 
(1)  estate  and  inheritance  taxes  and  (2)  the  surtaxes 
on  income,  excess-profits,  and  war-profits  taxes;  also, 
as  in  the  second  loan,  income  from  $5,000  principal  was 
exempt  from  these  three  latter  taxes. 

The  Third  Liberty  Loan  was  offered  to  the  public  on 
April  6,  1918,  the  first  anniversary  of  America's 
declaration  of  war,  and  the  selling  campaign  continued 
to  May  4.     A  slogan  of  this  campaign  was  "  Borrow 

'■Report  of  the  Secretary  of  the  Treasury,  1918.  p.  6. 

215 


WAR  COSTS  AND  THEIR  FINANCING 

to  buy."  The  situation  was  a  very  complex  one;  the 
former  issues  were  quoted  on  the  market  below  par,  and 
the  provision  regarding  inconvertibility  in  the  new  issue 
proclaimed  that  no  higher  rate  of  interest  would  be 
paid.  Every  effort,  therefore,  was  put  forward  to  ensure 
the  success  of  the  loan.  The  banks  extended  credit 
facilities  for  90  days  to  "  borrowers-to-buy  "  at  the  same 
rate  of  interest  as  that  borne  by  the  bonds.  The 
great  selling  organization,  numbering  over  2,000,000 
voluntary  workei^s  from  ex-Secretaries  of  the  Treasury 
to  10-year-old  Boy  Scouts,  reorganized  its  work;  groups 
became  responsil)le  for  their  individual  members;  the 
whole  country  was  mapped  out ;  the  quotas  assigned  to 
the  Federal  reserve  districts  were  reallotted  by  states, 
by  counties,  by  municipalities,  by  wards,  by  blocks,  and 
even  by  single  buildings.  Social  forces  were  so  mar- 
shalled as  to  exert  pressure  upon  the  laggard ;  publicity 
was  pitilessly  used;  buttons  and  posters  given  to  sub- 
scribers as  a  sort  of  receipt  served  to  differentiate  the 
slacker  from  the  patriot  and  at  the  same  time  economized 
the  efforts  of  the  sellers  and  saved  the  subscriber  from 
repeated  solicitation.  The  great  lists  of  former  drives 
were  checked  over  against  ward  rosters  and  precinct  and 
poll  lists,  and  the  missing  were  tabulated  and  sought 
out.  Four-minute  men  invaded  every  form  of  public 
entertainment,  restaurant,  and  meeting,  and  there  took 
subscriptions.  As  a  result  nearly  every  home  in  the 
United  States  numbered  at  least  one  subscriber.  The 
total  number  of  subscribers  was  18,308,325,  with  sub- 
scriptions of  $4,176,516,850. 

But  the  "  borrow-to-buy  "  policy  tended  to  put  a 
severe  strain  upon  the  banks.  On  April  5,  the  day 
before  the  opening  of  the  subscription  campaign  for  the 
Third   Liberty   Loan,   the   war  paper  in  the    Federal 

216 


LOANS  IN  THE  UNITED  STATES 

Reserve  Banks  stood  at  $304,075,000.  By  April  26,  when 
the  high-water  mark  in  this  respect  was  reached,  loans 
secured  by  war  paper  totaled  $642,429,000  or  71.2  per 
cent,  of  all  the  bills  discounted  by  the  Federal  Reserve 
Banks.  This  proportion  was  reduced  until  the  end  of 
July,  after  which  it  began  to  rise  again.  The  financial 
organs  sounded  a  warning  against  inflation,  and  every 
possible  check  was  used  to  remedy  the  situation. 

It  was  evident  that  retrenchment  and  personal 
economy  were  imperative.  To  be  sure  the  pressure  of 
war  taxation  restricted  retail  purchases,  and  war  loans 
curtailed  consumption  by  diverting  funds  from  ordinary 
purchases  to  war  uses.  But  in  addition  to  all  this,  the 
Government  officially  restricted  through  its  Capital 
Issues  Committee  the  flotation  of  new  security  issues. 
This  Committee's  sanction  was  withheld  from  industries 
which  neither  directly  nor  indirectly  contributed  to  the 
general  welfare,  and  in  the  case  of  others  sought  to 
prevent  competition  with  the  war  loans  of  the  Gov- 
ernment. In  order  to  furnish  capital  to  essential 
war  industries  which  needed  to  alter  or  enlarge 
existing  plants  for  the  purpose  of  increasing  their 
output,  the  War  Finance  Corporation  was  created. 
Its  procedure  was  to  lend  funds  to  the  banks  which 
themselves  advanced  funds  to  war  industries.  This  had 
a  two-fold  efifect :  it  relieved  the  l)anks  of  the  necessity 
of  extending  credit  to  these  war  industries,  an  operation 
which  partook  more  of  the  nature  of  investment  than 
of  commercial  banking  on  liquid  securities;  and  at  the 
same  time  it  prevented  private  enterprise  from  bidding 
up  by  competition  in  the  money  market  rates  of  interest 
to  a  point  higher  than  that  fixed  by  the  Liberty  Loans. 

A  certain  measure  of  relief,  moreover,  was  needed 
by  the  banks  at  this  time.     In  the  case  of  the  First 

217 


WAR  COSTS  AND  THEIR  FINANCING 

Liberty  Loan  no  oversubscription  had  been  accepted, 
and  in  the  case  of  the  Second,  only  50  per  cent,  of  the 
oversubscriptions  were  taken  by  the  Treasury.  Hence 
the  financial  institutions  that  had  underwritten  large 
blocks  of  bonds  were  relieved  of  the  heavier  part  of  the 
burden  by  the  allocation  of  the  full  amounts  of  their 
subscriptions  to  the  small  subscribers.  This  had  the 
effect  of  cutting  the  subscriptions  of  the  banks  to  com- 
paratively small  amounts.  Thus,  in  the  case  of  the  First 
Loan  the  total  subscriptions  of  the  national  banks  were 
$340,000,000,  and  the  allocation  on  subscriptions  was 
only  $180,00,000,  of  which  probably  half  was  passed 
on  to  subscribers  who  purchased  their  bonds  on  the 
instalment  plan.  In  the  case  of  the  Third  and  Fourth 
Loans,  however,  no  such  immunity  was  possible,  as  the 
Government  announced  that  it  would  accept  the  full 
amount  of  the  subscriptions;  the  banks,  consequently, 
became  the  owners  of  large  amounts  of  Government 
bonds.  The  effect  of  the  third  Liberty  Loan  on  the 
condition  of  the  banks  in  this  respect  is  shown  by  the 
increase  in  holdings  of  Government  securities  by  the 
national  banks  from  $2,120,649,000  on  March  4,  1918, 
to  $2,657,523,000  on  May  10. 

In  one  other  respect  the  Third  Loan  differed  from 
either  of  the  previous  ones,  namely,  in  the  provision  for 
a  bond-purchase  fund.  This  authorized  the  Secretary 
of  the  Treasury  until  one  year  after  the  termination 
of  the  war  to  purchase  bonds  in  the  open  market  not  to 
exceed  in  any  one  year  one-twentieth  of  the  amount 
outstanding.  The  purchase  was  not  limited  to  the  Third 
Loan  but  extended  also  to  the  bonds  of  the  first  and 
second  issues.  The  purpose  of  this  provision  was  to 
prevent  the  price  of  the  bonds,  which  were  quoted  at 
less  than  par  and  showed  a  further  downward  tendency, 

218 


LOANS  IN  THE  UNITED  STATES 

from  sinking  further.  During  the  period  between  the 
enactment  of  the  law  on  April  4,  1918,  and  October  31 
following,  bonds  to  a  total  amount  of  $344,036,500  were 
purchased,  cancelled,  and  retired.'^  This  action  un- 
doubtedly exercised  a  beneficial  effect  on  the  price  of 
outstanding  issues,  but  the  propriety  of  using  the  pro- 
ceeds of  the  loans  for  this  purpose  may  be  questioned. 
On  this  point  the  language  of  the  author  already  pub- 
lished in  another  place  may  be  quoted  :^ 

As  a  measure  of  debt  redemption  it  may  be  justified  on  the 
ground  that  the  Government,  even  though  it  was  still  in  the 
market  as  a  borrower,  was  buying  its  old  bonds  at  a  discount 
while  it  planned  to  sell  new  ones,  bearing  the  same  rate  of 
interest,  at  par.  As  a  method  of  maintaining,  or  endeavoring 
to  raise,  the  market  price  to  an  artificially  high  level  it  is 
open  to  objections.  But  as  a  means  of  preventing  a  sudden 
or  violent  decline,  whether  accidental  or  engineered  b}'  specu- 
lators, an  authorization  of  this  sort  is  probably  desirable. 
The  English  Exchequer  has  had  the  same  power  conferred 
upon  it  by  Parliament.  Obviously,  it  ought  to  be  employed 
with  the  greatest  possible  care  and  the  large  use  made  of 
this  expedient  by  the  Treasury  is  in  no  small  measure  due  to 
the  low  rate  of  interest  of  the  loans. 

A  loan  policy  which  should  utilize  the  patriotic  fervor  of 
a  people,  stimulated  by  the  contagious  enthusiasm  of  a  loan 
"  drive,"  and  then  attempt  to  maintain  an  artificial  price  by 
manipulating  the  market,  in  order  to  sell  bonds  at  an  unduly 
low  rate  of  interest,  would  be  open  to  severe  ci-iticism. 
Assuming  that  such  a  policy  were  possible,  the  bad  effects 
would  at  once  become  apparent  upon  the  return  of  peace 
when  Government  support  would  be  withdrawn  as  no  longer 
necessary.  The  price  of  the  bonds  might  then  fall  to  normal 
levels  and  an  undeserved  loss  be  inflicted  upon  such  holders 
as  might  be  compelled  to  sell  them  before  maturity.  .  .  . 
Such  a  procedure,  if  pursued  by  a  Government,  would  un- 

^  Report  of  the  Secretary  of  the  Treasury,  1918,  p.  71. 
*  Report  of  the  Committee   on   War   Finance  of  the   American 
Economic  Association,  p.  81. 

219 


WAR  COSTS  AND  THEIR  FINANCING 

doubtedly  affect  its  credit  when  it  next  appeared  as  borrower 
upon  the  money  market.* 

Scarcely  had  the  Third  Liberty  Loan  been  completed 
when  the  Treasury  began  preparations  for  further  credit 
operations.  Expenditures  had  outdistanced  revenues  by 
such  a  wide  interval  that  the  proceeds  of  each  succeeding 
loan  yielded  a  smaller  and  smaller  amount  of  clear 
money.  Having  run  behind  at  the  beginning,  the 
Treasury  had  never  been  able  to  catch  up,  and  had  been 
compelled  to  resort  in  ever  increasing  volume  to  antici- 
patory borrowing  by  means  of  certificates  of  indebted- 
ness. Expenditures,  now  running  over  $1,500,000,000  a 
month,  were  estimated  by  the  Secretary  of  the  Treasury 
at  $27,718,128,900  for  the  fiscal  year  ending  June  30, 
1919,  whereas  ordinary  receipts  were  estimated  at 
$6,846,900,000.  A  fourth  loan  was  inevitable  in  the 
fall,  but  it  was  hoped  to  finance  operations  during  the 
summer  by  further  issues  of  short  term  Treasury  certifi- 
cates. Accordingly  the  Fourth  Liberty  Bond  Act  was 
passed  on  July  9,  1918. 

The  Federal  Reserve  Banks  were  notified  on  June  32 
that  bi-weekly  allotments  of  $750,000,000  of  certificates 
of  indebtedness  would  be  made  to  a  possible  total  of 
$6,000,000,000,  and  they  were  requested  to  arrange  their 

'  Other  countries,  as  Great  Britain  and  Franco,  made  similar 
efforts  to  maintain  the  marlcet,  but  the  most  effective  measure  for 
supporting  the  price  of  Government  bonds  was  worked  out  in 
Canada.  There  all  dealings  in  Government  war  bonds  were  pro- 
hibited except  through  a  Loan  Committee  formed  to  deal  in  them. 
Commissions  were  paid  to  brokers  to  bring  in  buying  orders,  and 
prices  were  advanced  from  time  to  time  until  the  market  was 
brought  up  to  par.  The  plan,  however,  could  scarcely  be  adopted 
in  the  United  States  because  its  effect  was  to  deny  the  bonds  a 
free  market,  which  might  seriously  react  on  further  new  loans, 
or  would  require  the  expenditure  of  such  stupendous  sums  by  the 
Government  itself  to  deal  in  the  self-created  market  that  it  would 
merely  result  in  borrowing  to  buy. 

220 


LOANS  IN  THE  UNITED  STATES 

$6,000,000,000,  and  as  fiscal  agents  were  "  authorized 
and  requested  to  receive  subscriptions  up  to  an  aggre- 
gate "^°  specified  for  each  district.  Member  and  other 
banks  were  notified  to  this  effect,  and  beginning  with 
June  25  subscribed  for  themselves  or  distributed  to  their 
clients  seven  issues,  which  on  October  1  totalled 
$4,659,820,000. 

The  Fourtli  Liberty  Loan  consisted  of  $6,000,000,000 
in  414  per  cent.  15-20-year  inconvertible  bonds,  dated 
October  24,  1918.  Conditions  in  the  financial  market 
had  changed  since  the  Third  Loan,  and  it  was  feared 
that  the  rate  of  interest,  which  at  that  time  the  Secre- 
tary of  the  Treasury  hoped  had  been  stabilized  at  41/1 
per  cent.,  would  no  longer  prove  sufficiently  attractive 
to  secure  the  enormous  sum  which  it  was  now  proposed 
to  ask.  Moreover,  the  surtaxes  to  which  the  interest  on 
bonds  was  subject  had  been  extended  downward  to 
incomes  of  $5,000  while  the  rates  had  been  douliled,  thus 
cutting  the  income  from  bonds  very  materially  to  larger 
groups  of  taxpayers.  The  Bending  Revenue  Act  of  1918 
again  doubled  the  surtaxes.  The  Secretary  of  the  Treas- 
ury, in  advocating  before  Congress  the  imposition  of 
higher  normal  taxes  on  incomes,  to  wliicli  the  interest 
on  Liberty  bonds  was  not  subject,  pointed  out  as  an 
incidental  advantage  that  such  a  course  would  undoubt- 
edly make  the  bonds  of  the  fourth  issue  attractive  to 
investors  without  at  the  same  time  increasing  the  inter- 
est rate  for  the  life  of  the  bond.  As  the  normal  tax  rate 
was  now  12  per  cent,  under  the  pending  Revenue  Act, 
it  made  the  bonds  not  subject  to  it  a  very  favored  form 
of  investment  for  people  with  incomes  not  subject  to 
surtaxes.  The  successive  increases  in  the  rate  of  the 
normal  tax  therefore  had  the  effect  of  increasing  the 

"Announcement  of  the  Secretary  of  the  Treasurv. 

221 


WAR  COSTS  AND  THEIR  FINANCING 

value  of  the  bonds  for  those  who  desired  a  tax-exempt 
investment,  and  thus  of  keeping  down  the  rate  of  inter- 
est. As  long  as  the  revenue  requirements  of  the  Gov- 
ernment necessitated  the  progressive  raising  of  the  rate 
of  the  normal  income  tax,  the  market  value  of  the  bonds 
would  probably  not  fall  much  below  par. 

There  is  no  doubt  that  the  exemption  of  the  interest 
of  the  Liberty  bonds  from  normal  income  taxes,  together 
with  the  block  exemptions  from  surtaxes,  helped  to 
maintain  the  market  price  of  the  bonds.  Inasmuch  as 
the  latter  exemption  varied  somewhat  as  between  the 
different  bond  issues  there  was  a  certain  amount  of  dis- 
crimination. But  it  may  fairly  be  admitted  that  con- 
stant increases  in  the  interest  rates  would  have  intro- 
duced still  more  serious  discrimination,  unless  the  privi- 
lege of  conversion  of  the  law-interest-bearing  bonds  into 
those  with  higher  rates  had  been  granted,  in  which  case 
the  advantages  of  the  sale  of  the  earlier  issues  at  lower 
interest  rates  would  have  been  lost  to  the  Treasury. 
This  happened  in  Great  Britain,  where  interest  rates 
were  increased  to  make  the  later  issues  more  marketable. 

But  not  merely  were  the  bonds  to  be  made  attractive 
for  persons  with  incomes  not  subject  to  surtaxes;  an 
effort  was  also  made  to  prevent  holders  of  blocks  of 
former  issues  who  would  naturally  be  subject  to  surtaxes 
from  marketing  their  bonds  and  to  induce  them  to 
purchase  additional  bonds  of  the  Fourth  Loan.  For 
this  purpose  a  provision  was  inserted  in  the  Bond  Act 
of  September  24,  1918,  exempting  until  two  years  after 
the  termination  of  the  war  the  interest  on  $30,000  of 
bonds  of  the  Fourth  Liberty  Loan  in  the  hands  of  any 
taxpayer  from  surtaxes  and  excess  profits  and  war 
profits  taxes.    The  taxpayer  who  subscribed  for  $30,000 

222 


LOANS  IN  THE  UNITED  STATES 

of  these  bonds  and  still  held  them  at  the  time  of  making 
his  tax  return  would  also  receive  an  exemption  from 
such  taxes  after  January  1,  1918,  on  an  aggregate 
amount  of  $15,000  of  bonds  of  the  two  previous  loans, 
and  subscribers  in  lesser  amounts  would  receive  propor- 
tionate and  similar  exemptions.  These  exemptions  were 
in  addition  to  those  already  granted.  The  effect  of 
these  block  exemptions,  together  with  the  operation  of 
the  bond-purchase  fund,  had  the  effect  of  holding  the 
issues  up  to  a  price  only  slightly  below  par. 

The  Fourth  Liberty  Loan  was  offered  for  subscription 
on  September  29,  1918,  and  the  books  were  closed  on 
October  19.  The  campaign  for  this  loan  was  even 
more  highly  organized  than  the  third,  but  it  was  carried 
out  under  the  more  discouraging  handicap  of  the 
epidemic  of  Spanish  influenza.  Necessarily  a  campaign 
of  crowds,  it  suffered  from  the  enforced  closing  of  public 
places  under  the  orders  of  various  health  departments. 
The  efforts  of  the  four-minute  men  were  restricted  to 
street  corners,  automobile  trucks,  and  such  other  out- 
door platforms  as  were  available.  Receipts  and  badges 
of  honor,  besides  the  usual  buttons,  were  given  to  sub- 
scribers. In  lieu  of  the  great  public  appeals  house  to 
house  canvasses  were  made.  The  organization  of  over 
2,000,000  volunteer  workers,  in  spite  of  all  handi- 
caps, worked  tirelessly  during  the  three-weeks  drive. 
In  the  middle  of  the  campaign  the  workers,  doubting 
the  possibility  of  raising  so  huge  a  sum  in  the  unfavor- 
able circumstances,  canvassed  their  lists  again  for 
"  plus  "  subscriptions,  asking  former  subscribers  to 
increase  their  amounts.  The  slogan  of  the  campaign 
was  ''  Give  until  it  hurts."  Strong  appeals  were  made 
by  the  press,  and  banks  again  agreed  to  furnish  the 
needed  credit  facilities  to  enable  subscribers  to  finance 

223 


WAR  COSTS  AND  TIIEIK  FINANCING 

their  purchases  by  borrowing.  In  spite  of  all  handicaps 
the  loan  "  went  over  the  top,"  resulting  in  total  sub- 
scriptions of  $6,993,000,000  from  21,000,000  subscribers. 
The  effect  of  this  loan  on  the  assets  of  the  banks  was 
noteworthy,  as  their  offer  to  extend  credit  to  purchasers 
of  bonds  w^as  widely  accepted.  The  result  was  an  increase 
in  the  so-called  war  paper  held  by  the  Federal  Reserve 
Banks  from  the  then  record  mark  of  $685,000,000  on 
August  2,  1918,  to  $1,467,322,000  on  December  6,  after 
the  full  adjustment  of  the  loan  had  taken  place  in  the 
discounts  of  the  Federal  Reserve  Banks.  It  is  clear  that 
the  banks  in  the  United  States  played  a  role  in  financing 
the  war  not  very  different  from  that  assumed  by  the 
great  European  banks.  Purely  commercial  banking 
functions  were  for  the  time  being  subordinated  to  the 
necessities  of  the  Government,  and  although  it  is  impos- 
sible to  say  to  what  extent  the  banks  passed  on  this  load 
to  permanent  investors  in  Liberty  bonds,  it  must  be 
accounted  a  weakness  in  Government  finance,  as  well  as 
a  danger  to  the  banks  themselves,  that  their  resources 
should  have  been  drawn  upon  to  such  a  large  extent. 

"Within  a  little  more  than  three  weeks  after  the 
placing  of  the  Fourth  Liberty  Loan  the  Armistice  was 
signed  and  military  operations  were  suspended.  The 
loan  yielded  sufficient  funds  to  retire  the  $4,600,000,000 
of  certificates  of  indebtedness  outstanding  and  to  leave 
a  balance  of  $2,000,000,000  for  further  needs.  The 
signing  of  the  Armistice  on  November  11,  however,  by 
no  means  ended  war  expenditures ;  in  fact,  the  cancella- 
tion of  war  contracts  under  the  break  clause  entailed 
heavy  financing,  and  the  maintenance  of  two  million  men 
in  France  and  their  transportation  back  to  the  United 
States  caused  expenditures  to  reach  their  highest  peak 

224 


LOANS  IN  THE  UNITED  STATES 

in  December,  1918,  when  they  amounted  to  $2,060,975,- 
855.  By  the  end  of  January,  1919,  the  Secretaiy  of  the 
Treasury  estimated  in  a  statement  to  the  House  Com- 
mittee on  "Ways  and  ]\Ieans  that  the  expenditures  for 
the  first  seven  months  of  the  fiscal  year  amounted  to 
$12,954,498,537;  at  the  end  of  March  they  totaled 
$15,164,224,227.  It  was  evident  that  in  the  face  of  such 
enormous  outlays  the  balance  of  the  Fourth  Loan,  sup- 
plemented though  it  was  by  revenue  receipts,  would  not 
suffice  to  meet  current  expenditure.  Financing  by 
certificates  of  indebtedness  in  anticipation  of  the  Fifth 
Liberty  Loan  had  been  begun  as  early  as  December  5, 
1918,  and  between  that  date  and  March  13,  1919,  eight 
issues  were  made,  totaling  $4,920,256,500. 

The  months  following  the  signing  of  the  Armistice 
saw  the  first  steps  taken  toward  a  readjustment  of  in- 
dustry and  Government  finance  to  a  peace  basis. 
Government  control  of  industry  was  relaxed  by  the 
gradual  contraction  of  the  activities  of  the  various  war 
boards,  the  cessation  on  December  31  of  the  work  of  the 
Capital  Issues  Committee,  and  the  decision  of  the  Gov- 
ernment to  discontinue  financing  foreign  Governments 
beyond  the  existing  credits  of  $10,000,000,000.  Owing, 
however,  to  the  continuation  of  the  blockade  and  the 
lack  of  shipping  and  the  necessarily  slow  process  of 
demobilization,  it  was  not  possible  for  the  industries  of 
the  country  immediately  to  resume  their  pre-war 
activities. 

The  new  Revenue  bill,  which  had  originally  provided 
for  annual  revenues  of  $8,000,000,000,  was  modified  after 
the  signing  of  the  Armistice  so  as  to  yield  an  estimated 
revenue  of  $6,000,000,000  for  the  fiscal  year  1919.  It 
became  law  on  February  24,  1919,  barely  in  time  to 
allow  the  making  out  of  the  schedules  of  the  income 

225 


WAR  COSTS  AND  THEIR  FINANCING 

tax,  the  first  installment  of  which  was  due  on  March  15. 
This  installment  amounted  to  over  $1,000,000,000,  of 
which  $800,000,000  was  absorbed  by  maturing  certifi- 
cates of  indebtedness.  It  was  necessary  for  the  Treasury, 
therefore,  to  continue  its  reliance  upon  the  banks  until 
another  loan  could  be  floated.  The  Federal  Reserve 
Banks  had  from  70  to  80  per  cent,  of  their  total  resources 
invested  in  war  paper,  and  the  necessity  for  another  war 
loan  to  fund  these  short  term  obligations  grew  from 
day  to  day.  It  is  indeed  difficult  to  overestimate  the 
severe  strain  placed  upon  the  banks  of  the  country 
during  the  early  months  cf  1919  by  the  fourfold  neces- 
sity of  providing  funds  to  pay  taxes,  of  absorbing  the 
successive  issues  of  certificates  of  indebtedness,  of 
extending  commercial  credits  necessary  to  put  war 
industries  on  a  peace  basis,  and,  finally,  of  placing  the 
new  w^ar  loan. 

The  Fifth  Liberty  Loan,  known  as  the  Victory  Liberty 
Loan,  was  authorized  by  Congress  on  March  3,  1919,  but 
practically  all  details  as  to  interest  rate,  maturity,  and 
other  features  were  left  to  the  discretion  of  the  Secretary 
of  the  Treasury,  the  amount  alone  being  limited  by 
Congress  to  a  maximum  of  $7,000,000,000.  After  a  sur- 
\Ty  of  the  financial  situation  and  an  estimate  of  the 
probable  demands  on  the  money  market  for  the 
rehabilitation  of  peace  industries,  the  Secretary  of  the 
Treasury  announced  that  the  new  loan  would  be  limited 
to  $4,500,000,000,  that  no  oversubscription  would  be 
accepted  and  that  no  further  loan  would  be  asked.  This 
loan  was  to  consist  of  3%  per  cent,  tax-free  bonds  or 
4%  per  cent,  notes,  subject,  as  in  the  three  preceding 
loans,  to  the  estate  and  the  graduated  super-income, 
excess-profits  and  war-profits  taxes,  but  with  block 
exemptions  as  in  previous  loans,  and  in  addition  an 

226 


LOANS  IN  THE  UNITED  STATES 

exemption  from  the  last  three  taxes  of  the  interest  on 
$20,000  principal  of  bonds,  but  not  to  exceed  three 
times  the  amount  of  notes  owned  at  the  next  tax  ret\irn. 
The  4%  per  cent,  taxable  notes  were  convertible  into 
the  3%  per  cent,  tax-free  notes  and  these  in  turn  were 
freely  convertible  into  the  other  form.  The  new  notes 
were  dated  I\Iay  20,  1919,  and  matured  May  20,  1923, 
the  interest  being  payable  semiannually  in  June  and 
December,  with  the  right  of  redemption  in  the  Govern- 
ment in  1922,  A  wider  market  for  the  new  loan  was 
sought  to  be  created  by  exempting  the  w^ar-loan  obliga- 
tions of  United  States  from  all  taxation  when  in  the 
hands  of  nonresident  aliens,  in  the  hope  that  neutrals 
might  thereby  be  induced  to  invest,  espt^cially  in  those 
countries  where  the  exchange  was  adverse  to  the  United 
States.  The  Fifth  Liberty  Bond  Act  also  created  a 
cumulative  sinking  fund  composed  of  (1)  2%  per  cent, 
of  the  aggregate  amount  of  bonds  and  notes  outstanding 
on  July  1,  1920,  less  the  amount  of  foreign  obligations 
due  to  the  United  States  held  by  the  Treasury,  and  (2) 
the  amount  which  would  have  been  payable  for  interest 
on  such  bonds  or  notes  as  may  have  been  retired.  It 
was  estimated  that  under  the  operation  of  this  pro- 
vision the  war  debt  of  the  United  States  would  be 
expunged  in  25  years.  The  expired  privilege  of  con- 
version of  the  4  per  cent,  bonds  into  414  per  cent, 
was  revived  by  this  Act.  Finally,  the  "War  Finance 
Corporation  was  empowered  to  issue  bonds  to  the 
amount  of  $1,000,000,000  for  the  purpose  of  providing 
credit  with  which  to  promote  commerce  with  foreign 
nations,    such    credit    to    be    advanced^^    to    American 

"  DoA^Ti  to  May  10,  1920,  when  further  advances  were  sus- 
pended hv  order  of  the  Secretary  of  the  Treasury,  about 
$31,000,000  had  been  loaned. 

227 


WAR  COSTS  AND  THEIR  FINANCING 

exporters,  or  to  financial  institutions  in  turn  making 
advances  to  such  exporters,  for  appropriate  periods  up 
to  a  maximum  of  five  years. 

The  total  subscriptions  to  the  Victory  Liberty  Loan 
amounted  to  $5,249,908,300  —  an  oversubscription  of 
16.66  per  cent.  In  accordance  with  the  terms  of  the 
issue  the  oversubscription  was  rejected  and  the  sum 
originally  asked  for,  $4,500,000,000,  was  allotted  among 
the  subscribers.  Those  subscribing  up  to  and  including 
$50,000  received  the  full  amount,  and  the  subscribers 
to  larger  sums  received  from  80  to  42.39  per  cent,  of 
their  subscriptions.  The  number  of  subscribers  was 
11,903,895,  which  was  11.3  per  cent,  of  the  population. 
Although  this  showed  a  considerable  falling  off  from 
the  high  record  of  the  Fourth  Liberty  Loan,  it  was 
regarded  as  a  satisfactory  response  in  view  of  the  fact 
that  hostilities  had  now  ceased  and  the  appeal  for  funds 
now  rested  upon  other  grounds  than  those  which  had 
prevailed  during  active  war. 

The  form  of  Government  borrowing  known  as  war 
savings  certificates  was  authorized  by  Congress  on  Sep- 
tember 24,  1917,  and  was  put  into  effect  on  December  3 
of  the  same  year.  Although  modeled  on  the  English 
plan  of  the  same  name,  it  marked  an  improvement  over 
its  prototype.  In  Great  Britain  the  adjustment  of  inter- 
est was  controlled  by  the  date  of  purchase,  the  variation 
of  maturity  resulting  therefrom  being  very  cumbersome. 
According  to  the  plan  adopted  in  the  United  States,  the 
war  savings  stamp  of  a  face  value  of  $5  maturing  on 
January  1,  1923,  was  sold  during  the  month  of  January, 
1917,  at  $4.12,  and  the  purchase  price  increased  one  cent 
each  month  thereafter  during  the  year.  This  made  the 
yield  four  per  cent,  per  annum,  compounded  quarterly, 

228 


LOANS  IN  THE  UNITED  STATES 

Under  the  United  States  plan  there  was  also  issued  a 
thrift  stamp  which  sold  for  25  cents  but  which  bore 
no  interest.  To  the  purchaser  of  these  stamps  a  folder 
spaced  for  16  stamps  was  given  which  represented  when 
filled  an  investment  of  .$-}•,  This  could  then  be  exchanged 
for  an  interest-bearing  certificate  by  payment  of  the 
excess  over  $4  in  the  price  of  the  war  savings  certificate 
for  the  current  month. 

The  first  Act  limited  the  amount  of  war  savings  cer- 
tificates to  $2,000,000,000,  the  holdings  of  any  one  indi- 
vidual to  $1,000,  the  amount  purchasable  at  any  one 
time  to  $100.  This  later  limitation  was  repealed  by  the 
Act  of  September  24,  1918.  Later  the  law  was  amended 
so  as  to  make  the  limit  of  $2,000,000,000  apply  to  each 
annual  series,  a  series  being  issued  in  1919  to  mature 
in  1924,  and  another  in  1920  to  mature  in  1925. 

The  campaign  for  the  sale  of  war  savings  certificates 
and  thrift  stamps  opened  on  December  3,  1917,  under 
the  supervision  of  the  National  War  Savings  Committee. 
State,  county,  city  and  town  committees  were  organized 
throughout  the  country,  and  a  canvass  for  subscriptions 
was  begun,  less  feverish  than,  but  equally  persistent  with, 
those  of  the  loan  drives.  Individuals  were  pledged  to 
buy  certain  specified  amounts  weekly  or  monthly,  and  a 
nation-wide  campaign  in  the  interest  of  thrift  and 
economy  was  inaugurated.  The  clamor  for  "  business 
as  usual,"  of  which  so  much  had  been  heard  at  the 
beginning  of  the  war,  was  now  opposed  by  the  doctrine 
of  saving  and  investing.  At  first  progress  was  slow, 
but  the  efforts  of  the  committees  were  finally  effective. 
This  form  of  Government  borrowing  reached  down  to 
the  purses  of  the  smallest  wage-earner  and  even  to 
school  children.  The  financial  returns  from  this  source 
were  by  no  means  negligible,  as  the  yield  for  the  calendar 

229 


WAR  COSTS  AND  THEIR  FINANCING 

year  1918  was  $962,677,418/^  but  the  lessons  of  per- 
sonal thrift  and  economy  which  were  instilled  during 
the  progress  of  this  campaign  must  be  regarded  as  even 
more  valuable.  Although  evolved  as  a  form  of  war 
finance,  because  of  the  beneficial  social  results  it  has 
been  found  desirable  to  retain  the  system  as  a  feature 
of  normal  Government  borrowing. 


That  economic  and  financial  strength  were  equally 
important  with  military  operations  in  determining  the 
outcome  of  the  war  had  been  fully  shown  by  the  time 
the  United  States  entered  the  conflict.  The  drain 
upon  the  European  nations  had  been  terrific,  and 
although  the  Entente  Allies  had  borrowed  from  private 
sources  in  the  United  States  the  enormous  aggregate  of 
$2,912,395,287  down  to  April,  1917,  the  European 
belligerents  were  perilously  near  the  point  of  financial 
exhaustion.  The  most  important  immediate  contribu- 
tion made  by  the  United  States  to  the  cause  of  the 
Allies  was  the  extension  of  credits  by  this  Government. 

After  April  6,  1917,  the  financing  of  the  Allies  ceased 
to  be  the  function  of  private  enterprise  and  was  taken 
over  by  the  United  States  Government.  The  Bond  acts 
authorized  the  purchase  at  par  from  the  Allies  of  the 
United  States  of  their  obligations  bearing  the  same 
rate  of  interest    (first  Act  only)    and   containing  the 

*-The  steady  ^owth  in  the  sale  of  war  vSavings  and  thrift 
stamps  is  shown  by  the  following  table  of  receipts  into  the 
Treasury  from  this  source  by  months  to  the  end  of  1918: 

December,   1917   ...  $10,236,451 

January,    1918    . ,  .  25,559,722 

February,    1918    ..  41.148.244 

March,  "l918    53.967,864 

April,   1918    60,972,984 

May,    1918    57,956,640 

June,    1918    58,250,485 


July.   1918    211.417.942 

August,    1918   129,044,200 


September,   1918 
October,   1919    .  . 
November,  1918 
December,    1918 


97,614,581 

89.084.097 
73.689,846 
63,970,813 


230 


Total    $972,913,869 


LOANS  IN  THE  UNITED  STATES 

same  terms  and  conditions  as  the  obligations  of  the 
United  States  issued  under  each  Act.  The  method  by 
which  these  advances  were  made  was  to  establish  credits 
with  the  Treasury  for  specified  amounts,  which  were 
then  applied  to  the  purchase  in  this  country  of 
foodstuffs,  raw  materials,  and  munitions  of  war.  The 
foreign  Government  would  deliver  to  the  Treasury  its 
short-term  obligations  conforming  in  amount  and  matur- 
ity with  the  Treasury  certificates  issued  to  provide  the 
funds.  As  these  obligations  accumulated,  the  foreign  Gov- 
ernment from  time  to  time  converted  them  into  its  de- 
mand notes.  The  interest  was  adjusted  on  the  different 
forms  of  short-  or  long-term  obligations  so  as  not  in  any 
case  to  be  less  than  the  prevailing  rate  w^iich  the  United 
States  was  paying  its  citizens  for  the  funds  it  loaned  to 
the  foreign  Governments.  These  credits  were  finally 
fixed  by  the  fourth  Bond  Act  at  $10,000,000,000,  of  which 
$9,711,739,636  had  been  allotted  by  June  30,  1920. 
The  distribution  of  this  sum  among  the  various  belliger- 
ent Governments  is  shown  in  the  following  table : 

Advances  to  Allies  by  the  United  States  to  June  30,  1920 

Belgium $350,428,794 

Cuba    10,000,000 

C'zecho  Slovakia 4,277,000,000 

France   3.047,974.777 

Great  Britain 4,277,000.000 

Greece    48,236,629 

Italy 1,666,260,180 

Liberia    5.000.000 

Rumania    25.000.000 

Russia    187,720,750 

Serbia    26,780.465 


Total     $9,711,739,636 

In  order  to  prevent  undesirable  competition  among  the 
different  Allied  Governments  —  and  between  them  and 

231 


WAR  COSTS  AND  THEIR  FINANCING 

Disbursements  of  the  United  States  During  the  War 


Month 


Total 
disbursements 


1917:  March 
April 

May 

June 

July 

August 

September 

October 

November 

December 

1918:  January 
February 
March 
April 
May 
June 
July 
August 
September 
October 
November 
DecemJjer 

1919:  January 
February 
March 
April 
May 
June 


289 

526 

412 

662 

757 

746 

944 

986 

1,105 

1,090 

1,012 

1,155 

1,215 

1,508 

1,512 

1,608 

1,805 

1,557 

1,664 

1,935 

2,060 

1,962 

1,189 

1,379 

1,428 

1,112 

809 


,950,799 
,893,953 
,565,555 
,723,486 
,310,845 
,457,364 
,378,285 
,368,752 
,081,807 
,211,859 
,356,045 
,686,985 
,793,809 
,287,779 
,195,233 
,572,700 
,282,654 
,512,223 
,264,285 
,862,260 
,249,308 
,975,855 
,350,949 
,913,903 
,801,786 
,928,306 
,337,472 
,389,950 


the  United  States  —  for  supplies  produced  in  this 
country,  a  board  known  as  the  Inter-Allied  Purchasing 
Commission  was  constituted  in  August,  1917,  for  the 
purpose  of  expending  the  advances  made.  Through  the 
cooperation  of  this  Commission  and  the  "War  Industries 
Board  the  purchases  of  the  Allies  were  coordinated  witli 
those  of  the  United  States. 

The  extension  of  these  credits  to  the  Allies  placed  a 
continuous  strain  upon  the  finances  of  United  States. 

232 


LOANS  IN  THE  UNITED  STATES 

During  the  last  nine  montlis  of  tlie  year  1917  the 
monthly  advances  averaged  over  $400,000,000.  This 
figure  declined  somewhat  during  the  next  year  after 
the  direct  contributions  of  the  United  States  in  men  and 
supplies  became  greater,  but  the  average  for  the  year 
1918  was  well  over  $300,000,000  per  month.  The  monthly 
advances,  together  with  the  total  disbursements  of  the 
United  States  Treasury,  are  shown  in  the  table  on  page 
232. 

Congress  having  failed  to  provide  for  a  continuance 
of  Government  advances  to  Allies  during  the  period  of 
reconstruction,  further  advances  of  credit  to  foreign 
Governments  or  individual  enterprises  now  becomes  the 
concern  of  private  banking  in  the  United  States.  During 
the  continuance  of  the  M'ar  the  Government  alone  could 
have  met  the  enormous  demands  of  the  Allies,  but  it  was 
felt  that  with  the  termination  of  actual  hostilities  further 
financial  assistance  might  better  be  left  to  business 
interests.  During  the  period  of  actual  war  Government 
control  of  these  advances  was  necessary  as  the  labor  and 
materials  of  the  United  States  had  to  be  rationed  accord- 
ing to  a  unified  and  coordinated  program  which 
would  take  into  account  the  joint  needs  of  all  tire  bel- 
ligerents, but  during  the  period  of  economic  reconstruc- 
tion the  best  interests  of  industry  will  probably  be 
served  if  the  granting  of  credits  is  placed  upon  a 
commercial,  rather  than  a  military  or  political,  basis." 

"See  Chapter  XT  for  further  discussion  of  the  problem  of 
financing  Europe  after  the  war. 


CHAPTER  VIII 

TAXATION   IN   EUROPE 

Vigorous  use  of  taxation  in  England  — •  Slight  results  in  France, 
Russia,  and  Italy  —  Reasons  therefor  —  Inadequacy  of  taxa- 
tion by  the  Central  Powers. 

The  contrast  between  American  and  British  policy,  on 
the  one  hand,  and  that  of  Germany  and  her  allies,  on  the 
other,  is  more  striking  in  respect  of  war  taxation  than  in 
any  other  aspect  of  war  finance.  The  United  States  and 
Great  Britain  were  the  only  two  nations  that  raised 
sufficient  funds  by  taxation  to  meet  even  the  ordinary 
civil  expenditures  and  the  interest  charges  on  the  war 
debt.  These  two  countries  made  an  earnest  effort  also 
to  meet  at  least  a  part  of  the  war  costs  by  taxation.  But 
even  these  nations  fell  short  of  the  high  ideal  which  an 
able  student  has  defined  for  the  financial  management 
of  a  war,  that  it  should  be  a  "  tax  policy  assisted 
by  credits,  rather  than  a  credit  policy  assisted  by 
taxes. ' '  ^ 

Germany,  on  the  other  hand,  not  only  made  no  effort 
to  meet  any  part  of  her  expenditures  out  of  taxation, 
but  at  the  very  outset  of  the  war  announced  a  definite 
policy  embodying  this  view.  *'  We  do  not,"  declared 
the  Finance  Minister,  Dr.  Helfferich,  "  desire  to  in- 
crease by  taxation  the  heavy  burden  which  war  casts  on 
our  people."  Other  nations  have  followed  this  principle 
in  short  struggles,  but  this  was  the  first  time  that  it  had 
been  dignified  by  adoption  as  a  definite  policy  of  war 
finance.     The  war  was  to  be  fought  on  credit,  and  the 

*  Henrv  C.  Adams,  Science  of  Finance,  p.  542. 

234 


TAXATION  IN  EUROPE 

settlement  of  the  bills  was  to  be  deferred  until  after 
the  conclusion  of  peace.  The  complete  breakdoMTi  of 
the  loan  policy  has  already  been  described,  but  an 
account  of  the  inadequate  and  belated  tax  measures 
gives  further  point  to  that  analysis. 

The  other  nations  stood  between  these  two  extremes, 
though  it  must  be  confessed  that  most  of  them  conformed 
rather  with  the  German  than  with  the  Anglo-American 
example.  In  their  case,  however,  it  was  not  so  much 
the  result  of  conscious  policy  as  of  political  incapacity 
or  sheer  economic  inability  to  raise  the  necessary  taxes. 
So  rapidly  and  enormously  did  expenditures  increase 
that  even  the  interest  on  the  new  loans  outran  the  war 
revenues.  The  efforts  of  the  Continental  Entente 
Treasuries  were  directed  towards  meeting  in  any  fashion 
the  augmenting  costs.  Of  principle  there  is  little  trace 
to  be  found  in  their  operations,  for  they  were  simply 
swept  along  in  a  maelstrom  of  uncontrollable  expendi- 
tures without  ability  to  direct  their  course.  If  they 
could  keep  their  heads  above  water,  they  did  well.  In 
the  circumstances  European  war  finance  was  simply  a 
series  of  hand-to-mouth  expedients. 

The  British  policy  of  financing  the  war  may  fairly 
be  described  as  a  tax  policy  assisted  by  credits,  though 
at  all  times  the  dependence  upon  loans  was  far  greater 
than  the  resort  to  taxation.  In  view  of  the  unprece- 
dented expenditures  which  the  Government  was  called 
upon  to  meet,  this  was  inevitable,  but  on  the  whole 
Great  Britain  followed  the  time-honored  principle  that 
as  large  a  share  as  possible  of  the  war  costs  should  be 
met  out  of  taxation.  At  the  time  of  the  Napoleonic 
and  Crimean  Wars  the  proportion  of  costs  thus  defrayed 
out  of  taxes  had  run  as  high  as  47  per  cent.,  but  during 

235 


WAR  COSTS  AND  THEIR  FINANCING 

the  World  War  the  proportion  averaged  about  25  per 
cent,  of  the  total  expenditures. 

As  a  result  of  old-age  pensions  and  other  social  legis- 
lation on  behalf  of  the  working  classes,  the  expenditures 
of  Great  Britain  had  grown  rapidly  during  the  years 
preceding  the  war,  and  with  them  her  tax  revenues. 
For  the  fiscal  year  ending  March  31,  1914,  the  revenues 
had  been  $991,214,485,  and  the  expenditures,  $987,464,- 
840.  For  the  following  year  the  budget  of  INIay  4,  1914, 
had  proposed  new  taxes  amounting  to  about  $67,995,000 
for  the  purpose  of  carrying  out  the  program  of  social 
reform  and  of  relieving  local  taxation  of  some  of  its 
burdens.  The  Finance  Act  enacting  these  proposals  into 
law  was  passed  on  July  31,  1914,  four  days  before  war 
was  declared  against  Germany.  This  Act  fixed  the  rate 
of  the  income  tax  at  Is.  2d.  in  the  pound,  or  6I/4  per 
cent.,  at  which  it  had  stood  for  some  five  years  past; 
imposed  a  tax  of  5d.  a  pound  on  tea;  and  revised  and 
increased  the  death  duties.  It  was  estimated  that  these 
changes  would  bring  the  total  revenue  for  the  fiscal 
year  1915  up  to  about  $1,035,000,000. 

When  war  broke  out,  the  immediate  needs  of  the 
Treasury  were  met  by  the  discount  of  Treasury  bills 
and  a  resort  to  credit,  but  taxation  for  war  expenditures 
was  not  long  delayed.  On  November  17,  1914,  the  first 
war  budget  was  presented  by  David  Lloyd-George,  the 
Chancellor  of  the  Exchequer.  In  his  budget  speech  he  laid 
down  certain  principles  concerning  war  financing  which 
were  to  guide  Great  Britain  during  the  next  four  years : 

It  is  easier  to  raise  taxes  in  a  period  of  war  and  to  lower 
them  in  a  period  of  peace,  than  it  Avould  be  to  raise  even 
lower  taxes  in  a  period  of  peace.  .  .  .  It  is  a  time  of 
danger  when  men  part  willing^ly  with  anything  in  order  to 

236 


TAXATION  IN  EUROPE 

avert  evils  impending  on  the  country  they  love.  .  .  .  Every 
twenty  millions  raised  annually  by  taxation  during  this  period 
means  four  or  five  millions  taken  off  the  permanent  burdens 
thereafter  imposed  on  the  country. 

The  tax  proposals  consisted  of  a  doubling  of  the  rate 
of  the  income  tax  and  the  imposition  of  an  additional 
duty  on  tea  of  3d.  per  pound  and  of  an  additional  duty 
of  17s.  3d.  per  barrel  on  beer,  making  a  total  of  25s.  in 
all  on  this  beverage.  The  taxes  on  tea  and  beer  now 
amounted  to  about  80  per  cent,  of  their  original  cost. 
The  new  taxes  were  to  run  only  for  the  remainder  of 
the  fiscal  year  to  March  31,  1915,  when  a  new  budget 
would  make  more  permanent  provision  for  the  burdens 
of  war.  It  was  estimated  that  the  additional  duty  on 
tea  would  yield  $4,750,000  in  that  period ;  the  beer  duty, 
$7,500,000;  and  the  increase  of  the  income  tax  and 
supertax,  $62,500,000;  but  a  reduction  of  the  license 
fee  was  made  to  compensate  for  the  tax  on  beer,  which 
lessened  the  revenue  from  this  source  by  $2,250,000.  It 
is  clear  that  as  yet  the  problem  of  war  taxation  had  not 
been  seriously  attacked  and  that  these  taxes  could  be 
considered  only  as  a  temporary  makeshift.  Indeed,  this 
first  war  budget  did  not  include  a  single  new  tax ;  it  was 
simply  an  expansion  of  the  existing  peace  budget. 

The  second  war  budget  was  that  of  May  4,  1915.  It 
was  evident  by  this  time  that  the  war  was  not  to  end 
as  speedily  as  had  at  first  been  optimistically  anticipated. 
War  costs  were  mounting  rapidly.  The  deficit  for  the 
fiscal  year  1914-15  had  been  $2,039,250,000,  which 
was  somewhat  less  than  anticipated  because  of  the  fact 
that  the  increases  in  taxation  introduced  by  Lloyd- 
George  were  yielding  rather  more  than  had  been 
expected.     The  total  expenditures  for  the  fiscal  year 

237 


WAR  COSTS  AND  THEIR  FINANCING 

1915-16  were  estimated  at  $5,663,270,000,  whereas  the 
revenue  receipts  were  calculated  at  $1,351,660,000,  hav- 
ing a  deficit  of  $4,311,610,000  to  be  met  by  loans. 
Evidently  it  was  still  thought  that  the  war  would  be  of 
short  duration,  for  no  new  taxes  were  proposed,  and  the 
only  additions  to  existing  taxation  were  slight  increases 
in  the  wine  and  beer  duties.  The  additions  made  in  the 
previous  November  were  continued. 

A  vigorous  tax  policy  on  the  part  of  the  British  Gov- 
ernment was  first  introduced  by  the  third  war  budget 
of  September  21,  1915,  wlien  an  energetic  effort  was 
made  to  open  up  new  sources  of  tax  revenue.  The  need 
of  additional  revenues  was  clearly  shown  by  the  revised 
estimates  of  war  expenditures,  which  were  now  raised 
to  $7,950,000,000  from  the  April  estimate  of  $3,663,000,- 
000.  To  raise  this  enormous  sum  real  war  taxation 
would  have  to  be  resorted  to.  The  most  important 
source  of  revenue  under  the  scheme  proposed  by  the  new 
Chancellor  of  the  Exchequer,  Reginald  McKenna,  was 
the  income  and  supertax,  in  which  the  normal  income- 
tax  rate  was  raised  to  2s.  6d.  in  the  pound,  or  to  17.5 
per  cent.  Even  more  important  than  the  increase  in  the 
rate  was  the  reduction  of  the  minimum  exemption  from 
$800  to  $650,  so  that  a  great  number  of  taxpayers  who 
had  previously  escaped  direct  taxation  were  now  made 
to  contribute.  At  the  same  time  a  distinction  was  made 
between  earned  and  unearned  income,  the  latter  being 
somewhat  more  heavily  taxed.  The  supertax  ranged 
from  lOd.  to  3s.  6d.,  being  graduated  on  incomes  from 
$12,500  to  $500,000.  From  these  two  increases  addi- 
tional revenues  of  $67,120,000  were  estimated,  which, 
together  with  the  sum  already  collected  from  this  source, 
would  give  total  income  and  supertaxes  of  $582,120,000 
for  the  fiscal  year  1915-16. 

238 


TAXATION  IN  EUROPE 

The  real  war  tax  of  this  scheme  was  the  excess-profits 
tax,  which  was  now  introduced  for  the  first  time.  This 
was  a  tax  of  50  per  cent,  on  the  amount  by  which  the 
profits  for  the  accounting  period  "  exceeded  by  more 
than  $1,000  the  defined  pre-war  standard  of  profits." 
The  standard  was  the  average  profit  during  any  two 
of  the  three  years  preceding  191-i.  If  no  pre-war  stand- 
ard were  possible  to  define,  seven  per  cent,  of  the 
capital  employed  was  taken  as  the  basis  in  the  case  of 
individuals  and  six  per  cent,  in  the  case  of  corporations. 
The  accounting  period  named  under  this  Act  was  that 
of  August  4,  1914,  to  July  1,  1915,  the  intention  being 
to  tax  profits  during  later  periods  by  subsequent 
legislation.- 

Although  the  income  tax  now  reached  down  to  the 
man  with  an  income  of  $651  or  over,  it  was  felt  that 
even  those  with  still  smaller  incomes  must  be  made  to 
contribute  their  share  of  taxation.  But  as  it  was  mani- 
festly impossible  to  reach  such  persons  directly  through 
the  medium  of  the  income  tax,  it  was  planned  to  exact 
contribution  from  them  by  increasing  the  indirect  taxes. 
The  customs  and  excise  duties  were  accordingly  raised 
on  a  number  of  articles  which  were  generally  consumed 
by  the  masses  of  the  people,  such  as  tea,  coffee,  cocoa, 
chicory,  dry  fruit,  and  tobacco,  on  all  of  which  the 
duties  were  raised  by  50  per  cent. ;  sugar,  the  duties  on 
which  were  more  than  quadrupled,  from  Is.  lOd.  to  9s. 
4d.  per  hundredweight,  at  which  point  they  averaged 
31/2  cents  per  pound;  motor  spirits  and  patent  medi- 
cines, upon  which  the  duties  were  doubled;  and  cinema 
films,  watches,  musical  instruments,  imported  motor  cars 
and  motor  bicycles,  hitherto  untaxed,  were  now  burdened 
with  an  import  duty  of  88^3   per  cent.     Finally,  the 

^Economist,  November  27,  1915,  p.  85. 

239 


WAR  COSTS  AND  THEIR  FINANCING 

postal,  telegraph,  and  telephone  rates  were  raised.  From 
these  new  sources  it  was  hoped  to  secure  an  additional 
revenue  of  $57,500,000. 

These  tax  proposals  were  severely  criticized  at  the 
time  on  the  ground  that  they  did  not  tax  nonessentials 
and  luxuries  more  heavily  in  order  to  penalize  extrava- 
gance and  waste  and  possibly  to  stimulate  saving. 
Although  the  war  brought  hardship  and  suffering  to 
Great  Britain,  it  also  brought  prosperity  to  certain  ele- 
ments of  the  population.  Those  engaged  in  the  produc- 
tion of  munitions,  whether  as  contractors  or  workers, 
reaped  an  unexpectedly  bountiful  reward,  and  the  same 
was  true  of  other  branches  of  industry.  As  a  result  of 
the  sudden  rise  in  wages,  in  many  cases  to  unbelievable 
heights,  there  was  an  outburst  of  extravagance  and 
display  which  seemed  a  strange  accompaniment  to  war 
and  called,  in  the  opinion  of  many,  for  repressive  taxa- 
tion. The  situation  was  pictured  as  follows  at  the 
beginning  of  1916  :^ 

The  theatres  are  thronged;  the  picture  palaces  are  packed. 
The  country  roads  are  covered  with  a  procession  of  joy- 
riding motor-cars,  often  in  charge  of  a  chauffeur  assisted  by 
a  footman.  Many  of  the  shops  have  liad  such  a  Christmas 
season  as  never  before,  and  lurid  stories  are  afloat  of  the 
diamond  rings,  furs,  and  pianos  with  which  the  workers  are 
making  the  most  of  the  first  chance  they  have  had  of  spend- 
ing a  suri^lus  above  the  necessaries  of  life.  Some  few  are 
economizing  drastically,  but  they  are  nearly  all  folk  whose 
income  has  been  lessened  or  remained  stationary. 

In  spite  of  repeated  demands  for  a  tax  policy  that 
should  penalize  such  waste,  the  Government  contented 
itself  with  raising  the  duties  on  spirits  and  beer  and 
imposing  taxes  on  a  few  articles  of  general  consumption 

'Daily  Chronicle  (London),  January  8,  1916. 
240 


TAXATION  IN  EUROPE 

and  on  a  short  list  of  luxuries.  It  was  probably 
restrained  from  proceeding  further  along  these  lines  by 
the  fear  of  political  consequences.  The  result  was  a 
concentration  on  three  or  four  sources  of  revenue,  mostly 
direct. 

The  receipts  from  taxation  for  the  fiscal  year  1915-16 
proved  to  be  more  than  ]Mr,  McKenna  had  estimated  in 
September,  and  the  expenditures  were  somewhat  less. 
The  actual  expenditures  were  $7,795,790,000,  and  the 
revenue  receipts  were  $1,683,834,120.  Although  this 
was  a  satisfactory  showing  from  one  standpoint,  the 
percentage  which  revenue  represented  of  total  expenses, 

21.5  per  cent.,  was  much  lower  than  was  demanded  by 
British  public  opinion.     Taxes  alone  contributed  only 

18.6  per  cent.  On  the  other  hand,  war  expenditures 
were  steadily  mounting,  averaging  about  $25,000,000 
a  day  for  the  last  quarter  of  the  fiscal  year  1916.  The 
interest  and  sinking  fund  charges,  moreover,  now  con- 
stituted a  heavy  charge  on  the  civil  budget,  amounting 
to  $325,000,000  for  the  year.  It  was  clear  that  a  resort 
to  still  more  vigorous  taxation  would  have  to  be  made. 
Accordingly,  when  ]\Ir.  ]\IcKenna  brought  in  the  fourth 
war  budget  on  April  4,  1916,  making  provision  for  the 
fiscal  year  1916-17,  he  proposed  to  increase  the  tax 
revenues  to  $2,511,375,000.  In  order  to  raise  this 
enormous  sum,  he  preferred  to  increase  the  yield  of  a 
comparatively  small  number  of  taxes  rather  than  to 
impose  a  multiplicity  of  new  duties.  In  this  connection 
he  said:  "  There  is  a  limit  in  practice  to  the  number 
of  new  taxes  which  may  be  imposed  at  any  one  time,  and 
at  this  moment  when  the  need  is  so  great,  revenue  must 
be  my  first  object.  Innumerable  small  taxes  which 
bring  in  little  revenue,  cause  much  inconvenience,  and 
are  costly  to  collect  and  of  little  use  for  my  purpose." 

241 


WAR  COSTS  AND  THEIR  FINANCING 

The  budget  which  Mr.  McKenna  presented  at  this 
time  may  fairly  be  regarded  as  the  first  one  which 
grappled  earnestly  with  the  problem  of  meeting  a  con- 
siderable share  of  the  war  costs  out  of  taxation,  and  it 
was  really  the  only  effective  war  budget.  To  secure  the 
additional  revenue  the  income  tax  was  first  of  all  raised. 
Where  the  total  income  did  not  exceed  $2,500,  the  rate 
was  fixed  at  2s.  4d.,  and  it  progressed  from  this  point 
to  5s.  on  incomes  above  $12,500;  in  other  words,  the 
rates  ranged  from  III/4  per  cent,  to  25  per  cent.  These 
were  the  rates  on  earned  incomes.  On  unearned  incomes 
they  were  higher,  progressing  from  3s.  on  incomes  not 
exceeding  $2,500  to  5s.  on  incomes  over  $10,000,  which 
figure  out  at  15  per  cent,  to  25  per  cent.  The  supertax 
was  this  time  left  unchanged.  The  rate  of  the  excess- 
profits  tax,  which  had  met  with  popular  approval,  was 
raised  to  60  per  cent.  From  these  three  items  the 
Chancellor  hoped  to  secure  $963,675,000. 

Attention  was  then  given  to  customs  and  excise  duties. 
The  duty  on  cocoa  was  quadrupled;  that  on  coffee  and 
chicory  was  doubled;  that  on  sugar  was  raised  50  per 
cent.  New  taxes  were  imposed  on  table  waters,  cider, 
and  similar  beverages  and  on  matches,  and  license  fees 
for  automobiles  and  motorcycles  were  doubled.  Amuse- 
ments of  all  sorts  were  also  to  be  taxed,  including 
these  sources  it  was  hoped  by  the  Chancellor  to  raise 
$309,900,000. 

The  essential  feature  of  this  budget  was  the  recognition 
of  a  considerable  war  prosperity,  a  part  of  which  was 
to  be  diverted  into  the  Treasury.  As  this  war  prosperity 
was  temporary  and  was  made  at  the  expense  of  the 
nation,  it  was  an  eminently  fitting  object  of  taxation. 
So  far  as  it  appeared  in  the  form  of  profits,  it  was 

242 


TAXATION  IN  EUROPE 

levied  upon  by  the  war-profits  tax ;  so  far  as  it  appeared 
in  the  form  of  higher  wages,  it  was  best  reached  by 
indirect  taxes  on  articles  of  general  consumption.  The 
greater  part  of  the  burden  still  fell  upon  the  direct  tax- 
pa^an*,  although  heavier  levies  on  the  wage  earners  were 
also  imposed. 

The  budget  for  the  fiscal  year  1917-18  was  not  pre- 
sented until  May  2,  1917,  by  Andrew  Bonar  Law,  the 
new  Chancellor  of  the  Exchequer.  His  policy  was  more 
distinctly  a  loan  policy,  making  but  slight  changes  in 
the  existing  taxes  and  relying  mainly  upon  loans  to 
finance  the  war.  Expenditures  for  the  coming  year 
were  estimated  at  $11,451,905,000.  The  total  revenue 
was  estimated  at  $3,183,000,000,  an  increase  over  the 
preceding  year  of  $325,860,000.  Few  changes  were 
made  in  existing  taxes,  the  net  increase  from  this  source 
being  calculated  at  only  $130,500,000.  Indeed,  the 
small  addition  to  taxation  was  the  most  striking  feature 
of  the  budget,  and  one  which  called  forth  adverse  criti- 
cism. Thus,  the  London  Economist,  always  a  staunch 
advocate  of  vigorous  taxation,  commented  on  the  budget 
as  follows :  "In  the  face  of  extravagance  and  inflation 
the  only  cure  was  surely  taxation  or  compulsory  borrow- 
ing, which  alone  could  have  taken  out  of  the  hands  of 
thoughtless  and  ignorant  people  the  power  to  draw  the 
economic  energy  of  the  country  from  the  war  work 
upon  which  it  should  be  concentrated. ' '  The  new  taxes 
proposed,  or  rather  the  extension  of  old  taxes,  were 
the  following:  an  extra  Is.  lOd.  per  pound  on  tobacco, 
which  was  expected  to  bring  in  $30,000,000 ;  an  increase 
in  the  entertainments  tax  on  tickets  costing  more  than 
2d.,  $5,000,000;  an  increase  in  the  rate  of  the  excess- 
profits  tax  to  a  maximum  of  80  per  cent.,  the  munitions 
tax  now  being  consolidated  with  it,  $100,000,000.     On 

243 


WAR  COSTS  AND  THEIR  FINANCING 

the  other  hand,  further  rebates  were  made  on  liquor- 
license  duties  which  reduced  the  yield  from  this  source 
by  $4,500,000. 

In  the  budget  for  1918-19  the  revenues  were  estimated 
by  Bonar  Law  at  $4,210,250,000,  of  which  $339,000,000 
was  to  be  obtained  from  new  taxation.  The  income  tax 
was  increased  from  5s.  to  6s.  in  the  pound  on  incomes 
over  $2,500,  and  the  supertax  was  raised  from  Is.  to  4s. 
6d.  in  the  pound.  From  these  two  increases  a  yield  of 
$114,750,000,  or  just  one-third  of  the  new  taxation,  was 
anticipated.  Another  third  was  estimated  from  in- 
creased customs  duties,  the  chief  of  which  were  a  rise  in 
the  tobacco  tax  of  Is.  2d.  per  pound,  and  of  that  on 
sugar  from  lis.  8d.  to  25s.  8d,  per  hundredweight.  A 
doubling  of  the  tax  on  spirits,  beer  and  matches  was 
expected  to  yield  $89,250,000  additional;  the  balance  to 
be  obtained  from  an  increase  in  the  stamp  duties  on 
cheques  and  an  increase  in  postal  rates.  From  these 
estimates  it  is  seen  that  increasing  resort  was  being  had 
1o  indirect  taxes,  as  the  limit  of  endurance  seemed  to 
have  been  reached  in  direct  taxation. 

A  luxury  tax  was  also  voted,  which  was  to  be  levied 
at  the  rate  of  2d.  in  the  shilling  and  collected  by  means 
of  a  stamp  duty.  It  was  referred  to  a  committee  for  the 
purpose  of  working  out  the  details  and  was  not  reported 
out  by  them  until  August.  As  it  was  to  continue  only 
until  the  end  of  the  fiscal  year  and  at  that  time  was 
not  renewed,  the  returns  from  this  source  were  but 
slight.  For  purposes  of  this  tax  articles  were  divided 
into  two  groups :  In  the  first  were  included  articles  the 
character  of  which  as  luxuries  was  not  open  to  question 
and  which  were  taxed  irrespective  of  their  price;  in 
the  second  group  the  tax  was  imposed  only  if  the  price 
of  the  article  was  above  certain  specified  minima. 

244 


TAXATION  IN  EUROPE 

Tlie  revenue  receipts  of  Great  Britain  for  the  six  fiscal 
years  1914  to  1919  are  shown  in  the  following  table : 

Revenue  of  Great  Britain,  Fiscal  Years  1914  to  1919 

1014  $991,214,250 

1915  1,133,470,000 

1916  1.683,835,000 

1917  2.867,140.000 

1918 3,536,175,000 

1919  4,445,105,000 

Expenditures  in  France  before  the  war  had  already 
reached  a  point  where  it  was  difficult  to  provide  by 
taxation  the  funds  necessary  to  cover  her  ordinary  civil 
expenditures  and  the  interest  on  her  enormous  indebted- 
ness. Indeed,  in  the  very  year  in  which  the  war  began 
France  was  obliged  to  issue  an  additional  loan  to  cover 
the  peace  expenditures.  Wlien  the  German  invasion 
of  northern  France  tore  from  her  10  of  her  richest 
departments  and  the  mobilization  of  her  men  denuded 
industry  and  agriculture  of  their  best  workers,  it  seemed 
out  of  the  question  to  impose  new  taxes  or  to  raise  the 
rates  of  existing  taxes.  The  burden  of  the  war  itself 
constituted  a  crushing  tax  upon  France.  For  the  last 
five  months  of  the  year  1914  the  yield  from  existing 
taxes  fell  off  38.6  per  cent,  from  the  same  period  in  the 
preceding  year.  During  the  next  year,  1915,  there  was 
a  further  slight  decline  of  $24,400,000  below  the  tax 
receipts  of  1914,  but  if  the  last  five  months  of  1915  be 
compared  with  the  same  period  in  1914,  an  encouraging 
improvement  can  be  noted,  as  there  was  a  gain  of 
$74,400,000.  The  taxes,  however,  were  still  far  below 
normal.  Notwithstanding  the  disabilities  under  which 
France  was  laboring  in  the  matter  of  taxation,  any  resort 
to  heavier  burdens  was  deprecated  on  the  ground  that 
the  war  would  be  of  short  duration.    It  was  urged  not 

245 


WAR  COSTS  AND  THEIR  FINANCING 

only  that  no  taxes  be  levied,  but  that  not  even  a  definite 
loan  be  issued,  as  the  war  could  easily  be  financed  from 
the  Bank  of  France  and  by  the  issue  of  Treasury  bills.* 

By  the  end  of  1915  it  had  become  obvious  that  a 
speedy  termination  of  the  war  was  not  to  be  hoped  for, 
and  that  new  taxes  would  have  to  be  levied  in  order  at 
least  to  meet  the  growing  interest  charges  on  the  new 
loans.  Existing  receipts  were  now  not  even  meeting  the 
civil  expenditures  and  the  debt  service.  The  latter 
charges  amounted  to  $380,000,000  for  1915  and  $653,- 
•±00,000  for  1916.  Accoi-dingly,  the  year  1916  saw  for 
the  first  time  the  imposition  of  new  taxes  and  the 
t-xpansion  of  old  ones.  The  important  new  taxes  were 
the  income  tax  and  the  war  profits  tax.  The  income 
tax  was  not  a  war  tax,  strictly  speaking,  for  it  had  been 
decreed  by  the  law  of  July  15,  1914,  under  which  it 
was  to  go  into  effect  on  January  1,  1915.  But  the  out- 
break of  the  war  and  the  disorganization  of  all  business 
led  the  Assembly  by  act  of  December  26,  1914,  to  defer 
the  inauguration  of  the  tax  to  January  1,   1916. 

The  French  income  tax  was  imposed  upon  all  persons 
having  a  net  income  of  $1,000  or  over.  There  were 
various  deductions  and  abatements :  An  allowance  of 
$400  was  made  to  a  married  man  and  an  additional  $200 
for  each  dependent  child  up  to  five  in  number ;  beyond 
that  number  there  was  a  deduction  of  $300  for  each 
child.  A  limited  progression  was  introduced  into  the 
tax  by  a  rather  complicated  method.  The  tax  was  calcu- 
lated by  counting  at  one-fifth  the  income  between  $l-,0O0 
and  $2,000 ;  at  two-fifths  that  between  $2,000  and  $3,000 ; 
at  three-fifths  that  between  $3,000  and  $4,000;  and  at 
four-fifths   that   between   $4,000   and  $5,000;   all   over 

*  L'Economiste  Francais,  December  26,  1914;  January  30,  1915, 
p.  132. 

246 


TAXATION  IN  EUROPE 

$5,000  was  to  be  counted  at  its  full  value.  The  rate  of 
the  tax  was  two  per  cent.  Although  it  was  estimated 
that  this  tax  would  yield  revenues  of  about  $12,000,000 
to  $16,000,000,  the  actual  yield  for  the  first  year  of  its 
imposition  (1916)  amounted  only  to  $4,500,000.  The 
liberal  exemptions  granted,  the  low  rate  of  the  tax,  a 
certain  amount  of  evasion,  and  the  hardships  of  the 
French  people  all  helped  to  produce  this  low  yield. 

A  more  characteristic  tax  of  this  period  was  the  war 
excess  profits  tax,  which  was  imposed  upon  exceptional 
and  additional  war  profits  made  during  the  war.  As 
adopted  on  July  1,  1916,  the  law  taxed  profits  made  dur- 
ing the  war  and  was  to  continue  for  12  months  after  the 
cessation  of  hostilities.  The  average  net  profits  for  the 
three  years  prior  to  August  1,  1914,  were  taken  as  the 
normal  base  for  determining  war  profits,  and  upon  the 
excess  a  tax  of  50  per  cent,  was  levied.  The  rate  of 
taxation  was  increased  after  September  30,  1916,  to  60 
per  cent,  of  the  taxable  profits  over  $100,000.  Amounts 
of  $1,000  or  under  ^vere  exempt. 

Other  taxes  were  imposed  by  act  of  July  1,  1916,  as 
follows:  (1)  an  exceptional  war  tax  on  all  Frenchmen 
within  the  military  age  limit  who  for  one  reason  or 
another  were  not  called  to  the  colors;  (2)  certain 
so-called  *'  grouped  "  taxes  were  doubled,  such  as  those 
on  mines,  carriages,  horses,  clubs,  billiard  tables,  etc. ; 
(3)  the  existing  tax  on  securities  was  raised  by  one  per 
cent. ;  (4)  special  taxes  were  imposed  on  certain  colonial 
products,  such  as  tea,  coffee,  cocoa,  chocolate,  tobacco, 
etc.,  in  addition  to  the  existing  customs  duties;  (5)  a 
number  of  other  miscellaneous  taxes  were  imposed,  such 
as  those  on  theatres,  alcoholic  drinks,  and  special  phar- 
maceutical products;  (6)  and  finally,  rates  were  raised 
on  letters,  telegrams,  telephone  calls,  and  money  orders. 

247 


WAR  COSTS  AND  THEIR  FINANCING 

The  effect  of  these  new  impositions  was  seen  in  an 
increase  in  the  tax  revenues,  which  were  raised  for  the 
year  1916  almost  to  the  point  at  which  they  had  stood 
in  1913.  The  yield  for  1916  was  $933,286,500,  but  as 
the  interest  charges  on  the  growing  debt  now  amounted 
to  $653,400,000,  it  was  clear  that  additional  revenues 
would  have  to  be  raised.  The  yield  from  the  income 
tax,  moreover,  had  proved  distinctly  disappointing,  and 
the  deficit  from  this  source  would  have  to  be  made  good. 
In  spite  of  vigorous  opposition,  the  conviction  gradually 
prevailed  that  the  income  tax  must  be  made  more  lucra- 
tive and  that  other  sources  of  revenue  must  be  tapped. 
The  end  of  the  year  1916,  accordingly,  saw  the  intro- 
duction of  additional  tax  measures. 

An  act  of  December  30,  1916,  imposed  a  number  of 
additional  taxes  and  raised  in  a  drastic  manner  the  rates 
of  those  already  existing.  It  was  hoped  by  means  of 
these  new  levies  to  raise  about  $117,200,000  of  new 
revenue.  The  greatest  dependence  was  placed  upon  the 
general  income  tax,  which  was  now  made  much  heavier, 
the  minimum  exemption  being  reduced  from  $1,000  to 
$600  and  the  rate  progressing  from  one  per  cent,  on  the 
smallest  amount  to  10  per  cent,  on  the  excess  over 
$30,000.  Deductions  for  dependents  were  the  same  as 
under  the  former  law.  As  a  result  of  the  charges  and 
of  the  sharper  control  which  was  exercised,  the  yield  of 
the  tax,  which  had  been  estimated  at  $30,000,000  to 
$32,000,000,  proved  to  be  $36,600,000  for  the  year  1917. 

Although  France  was  still  depending  principally  upon 
loans  to  defray  the  cost  of  the  war,  she  was  nevertheless 
making  an  effort  to  increase  the  revenues  from  taxation. 
The  acts  of  July  1  and  December  30,  1916,  bad  broad- 
ened the  basis  of  taxation  by  the  addition  of  a  number 
of  new  taxes  and  by  increasing  the  rates  of  old  ones. 

248 


TAXATION  IN  EUROPE 

These  taxes  went  into  effect  on  January  1,  1917.  The 
French  mind,  however,  was  too  iogical  to  permit  the 
existing  patched-up  system  to  remain,  and  in  conse- 
quence, the  next  thing  to  be  done  was  to  overhaul  the 
old  taxes  not  yet  touched.  Early  in  the  year  1917, 
M.  Ribot,  the  Minister  of  Finance,  proposed  that  three 
antiquated  and  oppressive  old  taxes  be  canceled.  These 
were  the  tax  on  doors  and  windows,  the  business  tax 
(patentes),  and  the  inhabited  house  tax.  To  compensate 
for  this  loss  of  revenue  he  proposed  two  new  taxes, 
namely,  a  personal  tax  of  $1  on  each  person  with  a 
private  income  and  an  increase  of  20  per  cent,  in  the 
general  income  tax.  These  proposals  were  acted  upon, 
and  the  law  of  July  31,  1917,  which  carried  them  into 
effect,  marked,  according  to  an  eminent  French  author- 
ity, the  "  beginning  of  a  new  fiscal  era."^  The  abolition 
of  the  three  taxes  mentioned  above  was  carried  through, 
and  thus  were  got  rid  of  some  most  unequal  and 
vexatious  taxes.  The  new  taxes  proposed  by  ]\I.  Ribot, 
however,  were  not  accepted,  but  other  taxes  were  substi- 
tuted in  their  place.  A  new  annual  tax  was  imposed 
on  business  profits,  the  rate  of  which  was  4V2  per  cent., 
but  it  was  graduated  in  characteristic  French  fashion, 
with  an  exemption  of  $300.  A  special  tax  was  also 
imposed  on  the  turnover  of  retail  business  when  that 
turnover,  after  certain  deductions,  exceeded  $200,000. 
The  rate  was  graduated  from  one-tenth  of  one  per  cent, 
on  this  sum  to  one-half  of  one  per  cent,  on  the  excess 
over  $400,000.  Other  new  taxes  enacted  by  this  law 
were  a  tax  on  agricultural  profits  and  taxes  on  salaries 
and  the  liberal  professions,  at  a  rate  of  3-^4  Per  cent. 
All  of  the  above  were  to  go  into  effect  on  January  1, 1918. 

°  Gaston   Jeze,   Revue  de  Science  et   de  Legislation  financic7-c, 
XV,  p.  448. 

249 


WAR  COSTS  AND  THEIR  FINANCING 

During  the  year  1918  France  continued  the  same 
policy  of  endeavoring  to  increase  her  tax  revenue.  The 
total  estimated  receipts  from  taxation  for  the  year  1918 
were  $1,501,961,000,  or  about  $800,000,000  more  than 
had  been  raised  in  1913.  The  greatest  increase  had 
taken  place  not  unnaturally  in  direct  taxation,  especially 
in  the  income  and  war  profits  taxes.  A  new  tax  which 
was  imposed  during  this  year  was  the  so-called  luxury 
tax,  which  was  to  go  into  effect  on  April  1,  1918.  This 
was  very  unpopular  and  was  correspondingly  unsuc- 
cessful, at  least  as  a  revenue  producer.^ 

The  income  tax  was  revised  again  during  the  year 
1918.  The  exemption  minimum  was  fixed  at  $600  as 
before,  with  heavy  rebates  to  married  and  dependent 
persons.  Between  $600  and  $1,000  the  tax  rate  was 
1.5  per  cent.;  beyond  this  point  it  increased  by  one 
centime  for  each  $20  up  to  $30,000;  from  $30,000  to 
$110,000  the  tax  progressed  by  one  centime  for  each 
$200;  over  $110,000  the  rate  was  fixed  at  20  per  cent. 

The  revenue  receipts  of  France  during  the  war  were : 

Revenue  of  France,  Fiscal  Years  1914  to  1918 

1914    $796,821,386 

1915     776.794,297 

1916    963,286,447 

1917     1,261,200,000 

1918     1,326,800,000 

The  war  affected  the  revenue  of  Russia  disastrously. 
The  foreign  trade  was  reduced  to  about  20  per  cent,  of 
that  existing  before  the  war,  with  a  corresponding 
reduction  of  customs  revsnue  amounting  to  about 
$250,000,000  annually.  A  still  greater  sacrifice  of 
revenue,  amounting  to  almost  $450,000,000,  or  about  a 

*  See  my  article  on  "  Luxury  Taxes "  in  the  Bulletin  of  the 
yational  Tax  Association,  June.  1919.  pp.  237-239. 

250 


TAXATION  IN  EUROPE 

quarter  of  the  total,  was  made  by  the  abolition  of  the 
state  spirits  moDopoly  immediately  upon  the  outbreak 
of  the  war.  To  compensate  for  these  losses  new  taxes 
were  at  once  proposed.  These  comprised  a  freight  tax 
on  all  commodities  transported  within  Russia  by  rail  or 
water;  taxes  on  passenger  tickets  and  on  cotton;  and 
an  increase  in  the  postal  and  telegraph  rates.  These 
taxes,  however,  were  insufficient  to  make  up  the  deficit 
occasioned  by  the  loss  of  the  other  revenue. 

Few  new  taxes  were  imposed  during  the  year  1915. 
The  rate  on  city  realty  was  raised  from  six  per  cent. 
to  eight  per  cent.,  and  the  hut  tax  in  the  Asiatic 
provinces  was  increased  from  four  to  eight  rubles  a  hut. 
Taxes  on  apartment  houses  and  trade  guilds  were 
increased  50  per  cent.  From  these  four  sources  a  net 
revenue  of  $-13, 350,000  was  expected,  and  a  further  yield 
of  $47,400,000  was  anticipated  from  the  increase  of  a 
number  of  indirect  taxes,  such  as  those  on  tobacco, 
cigarette  papers,  matches,  beer,  wine,  sugar,  naphtha, 
and  yeast.  Finally,  increased  rates  on  a  number  of 
Government  monopolies,  such  as  higher  port  and  dock 
dues,  post  and  telegraph  charges,  and  railway  rates, 
were  expected  to  bring  in  $146,500,000.  The  total  from 
all  these  sources  was  estimated  at  $250,000,000.  By  the 
end  of  the  year,  however,  the  Finance  Minister  was  com- 
pelled to  announce  that  the  actual  receipts  had  fallen 
short  of  the  estimate  by  some  $168,000,000.  To  make 
up  this  deficit  Government  monopolies  of  tea,  sugar, 
matches,  coffee,  and  wine  were  proposed,  which  it  was 
estimated  would  bring  in  about  $150,000,000  a  year. 

The  year  1916  was  marked  by  the  introduction  into 
Russia  of  two  noteworthy  taxes.  The  first  of  these,  the 
war  profits  tax,  was  a  real  war  tax.  By  a  decree  of 
May  16,  1916,  a  temporary  tax  for  1916  and  1917  was 

251 


WAR  COSTS  AND  THEIR  FINANCING 

imposed  on  the  excess  profits  of  commercial  and  indus- 
trial undertakings  and  personal  industrial  earnings. 
Profits  of  less  than  eight  per  cent,  of  the  authorized 
capital  were  exempt  from  the  tax  on  excess  profits. 
Those  above  this  rate  were  subject  to  a  progi-essive  tax 
which  ranged  from  20  per  cent,  to  40  per  cent.  The 
earnings  from  personal  industrial  vocations  were  taxed 
at  the  rate  of  20  per  cent,  on  all  profits  above  $250. 
The  second  tax,  the  introduction  of  which  into  Russia 
was  made  possible  by  the  war  though  it  was  not  so  dis- 
tinctly a  war  tax,  was  the  income  tax.  This  was  made 
law  in  October,  1916,  but  was  not  to  come  into  operation 
until  January  1,  1917.  The  tax  was  graduated  on  all 
incomes  over  $425  a  year,  beginning  with  one  per  cent, 
on  that  amount  and  increasing  to  12.5  per  cent,  on 
incomes  of  $200,000  or  over.  It  was  estimated  that  the 
income  tax  would  yield  $20,000,000  per  annum.  These 
two  taxes  affected  only  the  well-to-do  and  the  industrial 
classes.  If  the  revenues  from  taxation  were  to  be 
increased  largely,  it  would  be  necessary  to  reach  the 
incomes  of  those  in  the  exempt  classes,  that  is,  the 
peasants  in  general.  Previously  they  had  been  reached 
by  means  of  the  vodka  monopoly,  and  now  plans  were 
suggested  for  an  increase  in  the  tax  on  sugar,  the  con- 
sumption of  which  had  increased  greatly. 

The  taxes  just  described,  which  were  to  have  gone 
into  effect  in  1917,  were  never  really  enforced  because 
of  the  outbreak  of  the  revolution  in  March  of  that  year. 
The  war  profits  tax  met  with  serious  opposition  from 
business  circles,  which  claimed  that  because  of  the 
increases  in  the  prices  of  raw  material  and  labor  such  a 
tax,  if  enforced,  would  destroy  industry.  It  was  pro- 
posed, therefore,  to  defer  the  le\y  of  this  tax  until  the 
following  year  and  to  provide  for  its  payment  in  install- 

252 


TAXATION  IN  EUROPE 

ments.  In  this  exigency  an  emergency  income  tax  was 
levied  in  June,  1917,  which  was  to  apply  only  to  tlie 
year  1917.  This  was  levied  on  all  persons  and  corpora- 
tions liable  in  that  year  to  the  ordinary  income  tax  if 
the  taxable  income  assessed  were  over  $5,000.  Owing  to 
the  disturbed  political  situation  and  the  uncertain 
powers  of  the  Provisional  Government  little  could  be 
done  to  enforce  existing  legislation.  In  the  circum- 
stances, therefore,  little  could  be  expected  from  these 
taxes,  and  as  conditions  became  more  and  more  unsettled, 
the  revenues  from  all  sources  showed  a  steady  decline. 

After  the  November,  1917,  revolution  there  was  no 
further  talk  of  taxation.  In  lieu  of  this  the  Bolsheviki 
raised  the  necessary  revenues  by  conscription  and  by 
the  nationalization  of  industry.  If  this  were  done  uni- 
versally, there  would  be,  of  course,  no  place  left  for  a 
system  of  taxation.  The  Bolsheviki  seem,  however,  to 
have  maintained  the  Government  monopolies.  Because 
of  the  decentralization  of  government  and  of  administra- 
tion the  national  system  of  taxation  broke  into  fragments 
wliich  were  taken  over  by  the  local  communes.  The 
Commissariat  of  Finance  on  November  7,  1918,  admitted 
that  $15,000,000,000  in  credit  notes  had  been  issued 
since  January  1.  The  note  issues,  which  stood  at 
$8,458,500,000  on  October  25,  1917,  when  the  Kerensky 
regime  came  to  an  end,  had  risen  by  June,  1919,  to  an 
amount  vai-iously  estimated  at  $35,000,000,000  to 
$50,000,000,000.  New  notes  were  being  printed  at  the 
rate  of  about  $2,500,000,000  a  month,  wnth  the  avowed 
purpose,  according  to  a  statement  attributed  to  Lenin, 
of  destrying  the  value  of  all  money  by  making  it 
worthless.  Five  hundred  and  thirteen  undertakings 
were  nationalized,  checking  production  and  also  profits 
in  the  non-nationalized  undertakings.    As  State  owner- 

253 


WAR  COSTS  AND  THEIR  FINANCING 

ship  resulted  only  in  loss,  the  revenues  were  badly  hit. 
The  tax  on  industries  fell  from  $02,900,000  in  the  first 
half  of  1917  to  $18,310,000  in  the  same  period  in  1918. 
The  budget  estimates  called  for  an  expenditure  in 
nationalizing  industry  of  $1,000,000,000  for  the  first  half 
of  1918  and  $100,000,000  for  the  second  half.  The 
budget  estimated  total  expenditures  from  January  to 
June  of  1918  at  $7,416,000,000,  and  from  July  to 
December,  1918,  at  $837,452,000.  The  revenue  side  of 
the  *'  budget  "  showed  receipts  from  State  undertakings 
of  $406,541,000,  practically  all  of  which  came  from  the 
nationalized  chemical  and  metallurgical  industries; 
receipts  were  therefore  less  than  half  the  expenditures 
on  State  undertakings.  Outside  of  these  two  industries 
the  manufacture  and  sale  of  tobacco  was  apparently 
the  only  flourishing  activity,  receipts  from  this  source 
for  the  first  half  of  1918  being  76  per  cent,  higher  than 
in  the  preceding  year,  and  those  from  cigarettes  and 
cigarette  holders  being  287  i>eY  cent,  higher.  The  budget 
of  the  Supreme  Council  for  1919  placed  expenditures 
at  $5,488,000,000  and  revenues  at  $2,937,165,000.^ 

The  revenues  of  Russia  during  the  four  years  1914  to 
1917  were  as  follows: 


Revenues  of  Russia,  Fiscal  Years  1914  to  1917 

1914     $1,449,000,000 

1915    1.397,000,000 

1916    1.457.000.000 

1917    1,870,000,000 

Italy's  record  in  the  matter  of  taxation  is  an  honor- 
able one.  Burdened  though  she  was  by  enormous 
expenditures   for   armament,   Italy  had   seemingly  de- 

'  These  facts  are  gathered  from  the  Russian  correspondence  of 
the  Economist.  See  especially  Jannarv  4,  1919,  p.  4;  March  1, 
p.  367;  May  3,  p.  718;  June  28,  p.  1175. 

254 


TAXATION  IN  EUROPE 

veloped  her  taxes  before  her  entry  into  the  war  to  the 
limit  of  the  ability  of  her  people  to  bear.  After  her 
entry,  with  the  growth  of  the  attendant  expenditures, 
the  need  of  additional  revenues  began  to  be  insistent. 
Almost  from  the  beginning  provision  was  made  for  the 
enlargement  of  old  taxes  and  the  imposition  of  new  ones. 
By  royal  decree  in  October,  1914,  a  general  program 
of  taxation  had  been  outlined,  which  Avas  later  put  into 
effect  under  various  legislative  decrees.  The  actual 
entry  of  Italy  into  the  war  in  May,  1915,  disrupted 
industry  and  trade,  and  the  consequent  shift  to  war 
production  made  the  taxation  yield  of  1915-16  fall  off 
from  the  1914-15  yield;  but  the  decrease  was  principally 
in  the  state  monopolies,  customs,  and  land  taxes,  and  as 
a  result  of  measures  enacted  to  protect  the  property 
rights  of  the  vast  body  of  men  called  to  the  colors. 
The  taxation  program  outlined  in  December,  1915, 
increased  the  price  of  all  commodities  of  which  the  State 
had  monopolies;  postal,  telephone,  and  telegraph  rates 
were  raised,  and  at  the  sajne  time  new  Government 
monopolies  were  created  and  new  taxes  introduced. 
These  latter  fell  under  two  heads,  (1)  levies  that  were 
expected  to  become  permanent  and  (2)  those  of  a  pro- 
visional character.  In  the  first  group  were  included 
income  and  business  taxes,  increase  in  the  postal  rates, 
increased  taxes  on  superfluous  commodities  such  as 
tobacco,  spirits,  beer,  and  petroleum,  and  new  taxes  on 
necessaries  such  as  salt,  matches,  sugar,  and  bicycles. 
From  all  of  these  taxes  the  estimated  yield  was 
$61,400,000.  In  the  second  group,  that  is  the  pro- 
visional taxes,  were  included  the  war-profits  tax  and 
one  or  two  minor  imposts  from  which  it  was  hoped  to 
obtain  $19,000,000,  or  a  grand  total  of  $80,400,000.  As 
a  result  of  these  new  taxes,  which  only  came  into  full 

255 


WAR  COSTS  AND  THEIR  FINANCING 

operation  during  tlie  year  1916-17,  the  total  revenues 
were  raised  by  $52,000,000  over  the  1915-16  yield. 

The  character  and  variety  of  the  new  taxes  illustrate 
strikingly  the  difficulty  with  which  Italy  was  raising 
these  additional  sums.  Unhappily  the  costs  of  the  war 
were  growing  so  rapidly  and  the  amount  of  her  loans 
had  swelled  to  such  proportions,  that  the  increased 
receipts,  secured  with  such  labor,  were  insufficient  to 
meet  even  the  growing  civil  expenditure  and  interest  on 
the  war  debt.  For  the  fiscal  year  1915-16  the  interest 
charges  amounted  to  $151,000,000  and  total  revenues 
fell  off  $30,641,000  from  the  la^t  peace  year  (1911), 
though  the  actual  increase  in  taxation  from  new  imposi- 
tions amounted  to  $75,000,000. 

By  decree  of  November  15,  1916,  further  taxes 
were  imposed  which  were  expected  to  bring  in  some 
$10,000,000  annually.  Under  this  decree  a  large 
number  of  taxes  was  levied  which  affected  almost  every 
commodity  and  business  transaction.  The  variety  and 
detailed  nature  of  the  taxes  w^as  characteristic,  for  in 
Italy,  as  in  France,  the  Government  seemed  to  prefer 
to  depend  upon  a  large  number  of  small  taxes  than  to 
concentrate  on  a  few  large  ones.  The  tax  on  war  profits 
was  first  of  all  considerably  increased  and  was  continued 
until  the  middle  of  1918.  The  tax  was  levied  on  profits 
over  eight  per  cent.,  and  the  rate  progressed  from  20 
per  cent,  on  the  loM^est  amount  to  60  per  cent,  on  profits 
that  exceeded  20  per  cent,  on  the  invested  capital. 
Other  taxes  were  imposed  on  men  of  military  age  who 
were  not  called  to  the  colors  and  on  proprietary  medi- 
cines and  fancy  toilet  articles;  stamp  taxes  were  also 
levied  on  bills  of  exchange  ajid  certain  other  commercial 
paper,  and  the  prices  of  various  classes  of  stamped  paper 
for    legal    documents    were    raised.      Limited-liability 

256 


TAXATION  IN  EUROPE 

companies,  motorcycles,  motor  cars,  motor  boats,  and 
house  rent  were  also  subjected  to  special  levies.  A 
monopoly  was  established  on  playing  cards,  and  finally 
rates  were  raised  on  telegrams  and  certain  postal  serv- 
ices. The  total  revenues  for  1916-17  were  $653,000,000. 
If  to  this  sum  there  be  added  the  profits  from  public- 
service  utilities  of  about  $120,000,000,  the  grand  total 
would  be  $773,000,000,  Since  much  of  the  new  taxation, 
especially  that  on  war  profits,  did  not  become  effective 
until  January  1,  1917,  the  revenues  of  this  fiscal  year, 
large  as  they  were,  did  not  after  all  represent  the  full 
potentialities  of  the  new  tax  system. 

The  revenues  for  the  next  fiscal  year,  ending  June  30, 
1918,  were  $929,000,000,  which  was  about  $168,000,000 
above  the  preceding  year.  The  income  and  business 
taxes  contributed  about  one-third  of  this  total,  or 
$292,460,000;  the  war-profits  tax  yielded  $80,560,000, 
which  was  more  than  had  been  anticipated.  On  the 
other  hand,  the  newly  imposed  taxes  on  motion  pictures, 
jewelry,  perfumes,  etc.,  showed  only  meagre  results, 
quite  incommensurate  with  the  irritation  they  caused. 
Large  gains  were  made  in  customs  revenues,  owing  in 
part  to  the  increased  importation  of  munitions  and 
foodstuffs  on  Government  orders.  The  greatest  gain 
was  made  from  state  monopolies,  which  yielded  a  total 
of  $223,800,000,  the  greater  part  of  this,  some  $184,600,- 
000,  being  derived  from  tobacco;  but  as  a  considerable 
part  of  this  was  purchased  by  the  army,  the  profits 
were  as  illusory  as  the  gains  from  increased  customs 
duties.  Still,  even  after  making  all  allowance  for  these 
factors,  the  increase  in  revenue  was  real  and  impressive. 

In  spite  of  all  efforts  to  increase  revenue  receipts,  the 
growing  costs  of  the  war  contrived  always  to  mount  more 
rapidly.    If  the  additional  expenditures  for  interest  on 

257 


WAR  COSTS  AND  THEIR  FINANCING 

the  debt,  for  pensions,  and  similar  items  were  to  be  met 
out  of  revenues  rather  than  loans,  it  would  be  necessary 
to  exact  even  larger  sums  from  the  people.  Accordingly 
in  the  year  1917-18  the  sale  and  supply  of  the  following 
articles  were  declared  to  be  State  monopolies:  coffee 
and  its  substitutes,  lubricants,  distilled  spirits,  coal  pro- 
duced in  Italy,  explosives,  electric-light  bulbs,  mining 
of  mercury,  tea,  sugar,  petroleum,  paraffin,  mineral 
oils,  and  quinine.  The  extension  of  State  monopolies 
was  very  unpopular  and  aroused  bitter  opposition  on 
the  part  of  business  int^'rests,  but  on  account  of  their 
productivity  the  policy  was  persevered  in  by  the  Gov- 
ernment. The  dictates  of  necessity  were  too  grave  to 
permit  of  any  compromise.  A  few  additional  taxes  were 
also  added  to  the  already  long  list,  the  most  important 
of  which  was  the  supplementary  income  tax  for  the 
fiscal  year  1919  only,  in  addition  to  the  existing  tax  on 
incomes.  This  began  with  one  per  cent,  on  incomes  of 
$2,000  and  ran  up  to  eight  per  cent,  on  those  over  $15,000. 
Italy's  revenues  during  the  war  are  shown  in  the 
following  table : 


Revenues  of  Italy,  Fiscal  Years  1915  to  1919 

1914-15    $609,340,000 

1915-16   601.405.000 

1916-17    761.000.000 

1917-18    929.000.000 

1918-19    971,000.000 


According  to  the  German  theory  of  financing  the  war, 
new  taxes  were  not  to  be  imposed  except  in  the  event  of 
a  deficit.  At  the  end  of  the  fiscal  yeai*  1915  (March  31) 
a  surplus  of  $43,800,000  was  announced  by  Dr. 
Helfferich,  the  Minister  of  Finance.  This  showing, 
which   on  the   face   of   it   apparently   evidenced    great 

258 


TAXATION  IN  EUROPE 

financial  strength,  was  secured  by  transferring  llie 
whole  of  the  military  and  naval  outlay  from  the 
ordinary  civil  budget  to  the  extraordinary  war  budget. 
As  the  item  thus  transferred  amounted  in  the  fiscal  year 
1913-14  to  about  $344,425,000,  it  will  be  seen  that  the 
so-called  surplus  was  only  nominal  and  that  there  was 
a  real  deficit  of  $289,675,000.  Moreover,  it  may  be 
pointed  out  that  although  the  Imperial  Government  had 
not  yet  resorted  to  taxation  to  meet  the  extraordinary 
cost  of  the  war,  heavier  taxation  was  already  being 
imposed  by  the  local  governments  and  by  the  separate 
states.  In  explanation  of  this  program,  if  not  in  its 
defense,  it  may  be  said  that  owing  to  the  fact  that  the 
revenues  of  the  Imperial  Government  were  indirect  and 
that  the  customs  duties  had  fallen  off  very  largely,  the 
Imperial  Government  found  it  very  difficult  to  enlarge 
its  tax  revenues.  The  direct  taxes  of  the  states,  which 
could  more  readily  be  adjusted  to  changing  needs,  were 
already  very  generally  being  raised. 

In  his  budget  speech  of  March  16,  1916,  Dr. 
Heifferich  for  the  first  time  urged  the  imposition  of 
new  Imperial  taxes.  These  were  very  slight,  however, 
and  were  designed  to  do  no  more  than  meet  the  interest 
charges  on  the  wax  debt.  He  proposed  a  war-profits 
tax,  the  increase  of  existing  taxes  on  tobacco,  cigarettes, 
bills  of  lading,  and  receipts,  and  additions  to  existing 
postal,  telephone,  and  telegraph  rates.  The  yield  from 
these  taxes  was  estimated  at  $125,000,000,  but  the  actual 
receipts  were  kept  a  secret  as  was  every  vital  fact 
connected  with  German  war  finance.  As  finally  passed 
by  the  Reichstag,  the  tax  measures  differed  in  several 
respects  from  those  proposed  by  Dr.  Heifferich.  The 
proposals  for  a  universal  receipts  tax  was  rejected,  and 
a   tax   on   the  yearly   sales   of   goods   was   substituted 

259 


WAR  COSTS  AND  THEIR  FINANCING 

therefor.  Sales  of  less  than  $750  were  exempt;  above 
that  sum  the  rate  was  fixed  at  one  dollar  per  thousand. 
The  tax  was  to  go  into  effect  on  October  1,  1916.  The 
other  proposals  were  accepted  with  only  minor  modifica- 
tions. As  a  result  of  these  changes  the  estimated  yield 
was  raised  from  $125,000,000  to  $145,000,000. 

By  the  end  of  another  year  the  enormous  increase  in 
the  public  debt  had  so  increased  the  charges  for  interest 
that  additional  revenues  were  imperative  if  this  charge 
were  to  be  met  out  of  revenue.  When  the  Reichstag 
met  on  February  22,  1917,  one  of  the  first  duties  laid 
before  it  was  that  of  voting  new  taxes.  The  Government 
proposed  a  20  per  cent,  increase  in  the  war  profits  tax, 
a  tax  on  the  Reichsbank,  and  new  taxes  on  coal  and  on 
railway  travel.  The  total  yield  of  these  new  taxes  was 
estimated  at  $312,500,000,  of  which  the  coal  tax  was 
estimated  to  furnish  $125,000,000  and  the  railway- 
traffic  tax  $78,500,000,  the  rest  being  from  the  addition 
to  the  war  profits  tax  and  the  tax  on  the  Reichsbank. 
Both  the  coal  and  the  railway  traffic  tax  were  very 
unpopular,  as  they  raised  the  cost  of  heating  and  light- 
ing and  travel  by  about  10  per  cent.  Although  this 
addition  to  tax  revenue  marked  a  considerable  increase 
over  the  preceding  year,  it  was  yet  insufficient  to  meet 
the  gi'owing  civil  expenditures.  If  Germany  were  to 
avoid  continued  deficits  and  the  payment  of  interest  on 
her  war  debt  out  of  new  loans,  a  policy  which  until 
now  she  had  followed,  still  heavier  taxation  would  be 
needed.  This,  however,  was  becoming  increasingly  diffi- 
cult to  secure.  The  people  were  already  war-weary, 
nnd  the  Government  hesitated  to  impose  new  burdens 
in  addition  to  those  which  the  war  itself  had  brought. 

By  1918  the  financial  situation  had  reached  such  a 
desperate  pass  that  there  could  no  longer  be  any  tempo- 

260 


TAXATION  IN  EUROPE 

rizing.  Accordingly,  the  Government  introduced  far 
more  extreme  proposals  for  taxation  in  its  1918-19 
budget  than  it  had  yet  ventured  to  suggest.  No  fewer 
than  11  new  revenue  measures  were  proposed,  which 
it  was  estimated  would  yield  additional  revenues  of 
$718,750,000.  Taxes  were  proposed  on  practically  all 
beverages;  they  were  applied  also  to  exchange  and  to 
certain  business  transactions.  A  belated  luxury  tax  was 
introduced,  and  the  rate  of  the  war  profits  tax  was  again 
raised,  as  were  also  the  postal  rates.  This  enumeration 
shows  the  difficulty  with  which  the  Imperial  Government 
was  confronted  by  reason  of  its  restriction  to  indirect 
taxation.  The  heavy  inheritance  and  income  taxes  of 
England  and  the  United  States  were  wholly  lacking,  as 
these  belonged  in  Germany  to  the  separate  states.  The 
war  profits  tax  too,  brought  in  less  than  it  should  have, 
owing  to  the  peculiar  method  of  levy. 

The  estimated  budget  revenues  for  new  taxation  are : 


1916-17  $120,000,000 

1917-18  312,500,000 

1918-19 718,750.000 


Total  $1,151,250,000 

The  only  utterance  on  the  actual  returns  from  taxa- 
tion was  the  cryptic  statement  of  Count  von  Roedern  in 
the  Reichstag  in  March,  1918,^  when  he  declared  that 
more  had  been  raised  by  taxation  in  Germany  than  was 
generally  supposed.  He  said  that  about  $2,000,000,000 
had  been  raised,  as  follows :  War  profits  tax  and  Reichs- 
bank  tax,  $1,250,000,000;  increases  in  municipal  direct 
taxes  for  w^ar  relief,  $500,000,000;  and  $250,000,000 
from  the  special  defense  levy  of  1913.     No  lipht  was 

'Reported  in  the  Economist,  March  9,  1918,  p.  425. 

261 


WAR  COSTS  AND  THEIR  FINANCING 

thrown  upon  the  question  as  to  how  far  this  actual  yield 
liad  been  offset  by  deficits  in  normal  revenues,  the 
budgeted  new  taxation  being  superimposed  on  the 
normal  peace  budget  of  1913-14,  in  which  customs  alone 
had  yielded  $17,000,000,  practically  all  of  which  must 
have  been  lost  as  a  result  of  the  blockade.  On  the  other 
hand,  if  the  municipalities  met  out  of  taxation  the 
$1,124,000,000  expended  by  them  on  separation  allow- 
ances and  relief  to  families  of  mobilized  men,  which 
Dr.  Schiffer  announced  was  an  Imperial  debt  to  them, 
Germany  must  fairly  be  credited  with  having  raised 
revenues  to  meet  war  expenditures  to  the  extent  of  that 
amount,  even  though  this  was  actually  done  by  the 
the  rauncipalities  instead  of  by  the  Imperial  Government. 
The  estimated  revenues  of  Germany  for  the  fiscal 
years  1915  to  1919  were  as  follows: 

Rev-enues  of  Gebmaxt,  Fiscal  Years   1915  to  1919 

1915   .$851,294,600 

1916  829,270,125 

1917  970.729.732 

1918  1,116,134,367 

1919  1,533,824,194 

The  revenue  receipts  of  Austria  showed  a  considerable 
fall  during  the  first  two  years  of  war,  but  after  that 
they  began  to  increase.  Never,  however,  were  they 
sufficient  to  meet  the  necessities  of  the  civil  budget  and 
of  the  growing  debt  service  occasioned  by  the  war.  The 
Government  made  a  fairly  determined  but  unsuccessful 
effort  to  secure  additional  revenue  from  taxation.  In 
1915  the  rates  of  court  fees  and  duties  on  inheritances 
were  raised  by  royal  decree,  but  as  these  new  rates  were 
not  to  come  into  effect  until  January  1, 1916,  the  revenues 
for  the  year  1915  were  not  affected.     During  the  yrar 

262 


TAXATION  IN  EUROPE 

1916  many  increases  in  existing  taxes  were  introduced. 
The  main  source  of  direct  taxation  in  Austria  had  long 
been  a  personal  tax  law,  which  had  been  amended  in 
the  spring  of  1914  so  as  to  increase  the  scale  of  the 
income  taxes  and  introduce  a  surtax  on  directors'  fees. 
In  spite  of  the  Russian  occupation  of  part  of  the 
Empire,  the  yield  for  1914  was  only  slightly  less  than 
that  of  the  preceding  year,  when  it  amounted  to 
$86,300,200.  In  1915  it  actually  increased  to  $87,456,- 
400.  In  1916  the  rates  were  considerably  increased,  in 
some  cases  to  double  the  previous  ones.  It  is  impossible 
to  state  the  yield  from  the  various  increases,  but  if  they 
were  commensurate  with  the  increase  in  the  rates,  there 
should  have  resulted  a  substantial  augmentation  of  the 
revenues  of  the  Empire.  Nothing  seems  to  have  been 
done  during  the  year  1917  in  the  way  of  introducing 
new  taxes  or  raising  the  rates  of  existing  ones.  Popular 
discontent  was  now  so  great  that  the  Government  feared 
to  impose  new  burdens.  In  spite  of  the  growing  needs 
of  the  Treasury,  a  proposal  to  introduce  an  Imperial 
income  tax  was  rejected  in  1918.  The  yield  from  the 
other  taxes,  although  increasing  in  nominal  amount, 
really  represented  a  greatly  decreased  purchasing  power 
in  view  of  the  depreciation  of  the  currency.  The  follow- 
ing table  shows  the  Imperial  revenues  during  the  war : 

Eevenues  of  Austria  and  Hungary,  1915  to  1918' 

Austria  Hungary 

1915    $692,145,200       $452,831,400 

1916    641,847,600         401,000,000 

1017     777,528,600  536,000,000 

1918    971,000,000         893,780,000 

"The  budgets  for  Hungary  in  1916  and  1917  were  not  pub- 
lished,  and  these  figures  are  estimated  according  to  the  propor- 
tionate decrease  or  increase  in  the  Austrian  budgets.  All  other 
•figures  are  budget  estimates,  and  probably  only  faintly  cor- 
respond with  the  real  facts. 

263 


CHAPTEE  IX 

TAXATION  IN  THE  UNITED   STATES 

A  new  era  of  Federal  taxation  —  Revenue  Act  of  October  3,  1913 
—  Outbreak  of  the  European  War  —  Emergency  Revenue  Act 
of  October  22,  1914  — Act  of  September  8,  1916  —  The  taxa- 
tion of  wealth  —  Act  of  March  3.  1917  —  Declaration  of  war 
by  the  United  States  —  War  Revenue  Act  of  October  3,  1917 
.  — Income  and  excess  profits  tax  provisions  —  Act  of  Febru- 
ary 24,  1919  —  Analysis  of  the  measure. 

The  year  1913  ushered  in  a  new  era  of  Federal  taxa- 
tion in  the  United  States.  Prior  to  that  date  the  chief 
sources  of  revenue  had  been  the  customs  duties,  taxes 
on  distilled  spirits  and  tobacco,  and  since  1909  an  excise 
on  corporate  incomes.  The  total  yield  for  1913,  includ- 
ing postal  revenues,  was  slightly  over  $1,000,000,000, 
around  which  figure  it  had  fluctuated  for  several  years. 
In  1913,  however,  the  tariff  was  revised  and  greatly 
lowered  on  raw  materials  necessary  to  the  American 
manufacturer.  As  the  lowered  tariff  directly  affected 
the  Treasury  receipts,  it  was  necessary  to  make  good 
the  loss  in  revenue,  and  for  this  purpose  the  income  tax 
was  introduced  as  a  part  of  the  Underwood-Simmons 
Kcvenue  Act  of  October  3,  1913.  This  had  been  made 
possible  by  the  promulgation  on  February  25,  1913,  of 
the  Sixteenth  Amendment  to  the  Federal  Constitution. 

Although  the  main  purpose  in  the  imposition  of  the 
income  tax  was  to  make  good  the  loss  in  revenue 
involved  in  the  reform  of  the  tariff,  just  as  the 
British  income  tax  had  been  an  integral  part  of 
Peel's  tax  reform  in   1842,  yet  another  very  definite 

264 


TAXATION  IN  THE  UNITED  STATES 

purpose  in  the  passage  of  this  Act  was  the  imposi- 
tion of  heavier  burdens  of  taxation  upon  the  pos- 
sessors of  large  wealth.^  Mr.  Underwood,  Chairman 
of  the  House  Committee  on  Ways  and  Means,  in  reply 
to  a  taunt  that  the  income  tax  was  added  because  other- 
wise sufficient  revenues  could  not  be  raised  by  his  tariff 
measure,  answered  that  the  Republicans  were  blind  to 
the  trend  of  the  times;  that  the  Democrats  did  not 
propose  to  pass  the  bill  because  they  were  compelled  to, 
but  because  "  the  time  has  come  in  this  country  when 
the  great  untaxed  wealth  of  America  must  and  shall 
bear  its  fair  share  of  running  the  Government  of  the 
United  States.  .  .  .  We  remove  the  taxes  at  the 
customs  house  on  necessaries  purposely  to  levy  a  tax 
on  wealth.  I  wish  my  friends  on  the  other  side  clearly  to 
understand  this."-  Cordell  Hull  of  Tennessee,  who  was 
the  real  author  of  the  income  tax  section  of  the  Act,  was 
even  more  explicit,  and  asserted  that  the  income  tax 
was  intended  to  shift  the  burden  to  those  who  are  best 
able  to  pay."  Similarly,  Senator  Simmons  of  North 
Carolina,  Chairman  of  the  Senate  Finance  Committee, 
stated  that  "  the  income  section  is  not  framed  to  supply 
a  deficit  in  revenue,  but,  on  the  contrary,  is  based  on 
the  theory  tha,t  property  should  bear  its  just  share  of 
the  Federal  as  well  as  state  taxation,  and  therefore  the 
rate  of  this  tax  should  be  fixed  with  a  view  to  requiring 
the  wealth  of  the  country  as  reflected  in  the  income 
of  the  well-to-do  to  contribute  equitably  to  these 
expenses."*    From  John  Sharp  Williams  of  Mississippi 

^  See  my  article,  "  The  Taxation  of  Wealth,"  in  the  Bankers' 
Magazine  (New  York),  August,  1917,  from  which  the  following 
citations  are  quoted. 

-  Congressional  Record,  \,  Part  III,  p.  332. 

^Ihid.,  p.  505. 

*Ihid.,  p.  2553. 

265 


WAR  COSTS  AND  THEIR  FINANCING 

came  perhaps  the  frankest  statement  of  purpose.  ' '  This 
bill,"  he  said,  "  marked  the  inauguration  of  a  new 
philosophy  of  taxation,  and  as  it  is  perfected,  the  taxes 
upon  consumption  will  dwindle  more  and  more,  and  the 
income  tax  will  more  and  more  take  their  place. ' ' 

Turning  from  a  statement  of  purpose  to  the  record  of 
achievement,  the  broad  outlines  of  the  income  tax  of 
1913  may  now  be  noted.  The  net  incomes  of  all  single 
persons  in  excess  of  $3,000  (married  persons,  $4,000) 
were  subjected  to  a  normal  income  tax  of  one  per  cent 
on  the  excess  over  $3,000  f  married  persons,  $4,000).  In 
addition  to  this  normal  tax,  there  was  also  an  additional 
tax  or  surtax  upon  persons  whose  incomes  exceeded 
$20,000,  which  was  graduated  according  to  the  following 
scale : 

Income  Surtax,  per  cent. 

$20,000  to  $50.000 1 

50,000  to     75,000 2 

75,000  to  100,000 3 

100,000  to  250,000 4 

250,000  to  500,000 5 

500,000  and  over 6 

The  highest  ra,te  under  this  tax  was  thus  seven  per 
cent,  (normal  and  additional  upon  the  largest  incomes). 
The  Act  was  retroactive,  applying  the  first  year  to 
income  received  between  March  1  and  December  81, 
1913,  and  thereafter  to  the  income  received  during  the 
calendar  year.  Tax  returns  were  to  be  made  before  March 
1  of  the  ensuing  year  and  the  tax  paid  in  June.  The 
yield  from_  the  income  tax  was  considerably  less  during 
the  first  year  than  had  been  estimated  by  the  Secretary 
of  the  Treasury,  but  with  greater  experience  and  a 
better  trained  corps  of  officials,  more  was  secured  in 
subsequent  years  from  this  source. 

266 


TAXATION  IN  THE  UNITED  STATES 

In  addition  to  the  personal  tax  on  individual  incomes, 
the  Revenue  Act  of  1913  also  imposed  a  corporation 
income  tax.  The  special  excise  tax  of  one  per  cent,  on 
net  profits  over  $5,000  of  corporations,  joint-stock  com- 
panies, and  associations  organized  for  profit,  which  had 
been  first  levied  in  1909,  was  extended  in  1913  to  all 
the  net  earnings  in  excess  of  $5,000. 

For  the  three  fiscal  years  during  which  this  Act  was 
in  force,  the  yields  of  the  personal  and  corporation 
income  taxes  were  as  follows : 

Income  Tax  Yield,  1914  to  1916 


Personal 

Corporations 

Total 

1914 

1915 

$28,253,525 
41,046,162 
67,957,489 

$43,127,740 
39,144,532 
56,909,942 

$71,381,273 
80,190,694 

1916 

128,867,430 

The  numbers  of  persons  who  were  assessed  for  the 
income  tax  during  these  three  years  were  357,598, 
357,515,  and  374,652,  respectively.  In  the  first  year 
the  normal  tax  of  one  per  cent,  on  all  taxable  income 
of  individuals  produced  $12,728,028,  and  the  surtaxes 
on  incomes  over  $20,000  a  year  yielded  $15,525,497.  Of 
this  group  those  with  incomes  over  $100,000  a  year  paid 
$9,628,381,  or  about  one-third  of  the  total  amount  paid 
by  individuals.  These  proportions  were  not  essentially 
changed  in  the  two  subsequent  years. 


The  European  "War,  which  broke  out  in  midsummer 
of  1914,  immediately  affected  the  revenues  of  the 
Federal  Government  and  necessitated  the  imposition  of 

267 


WAR  COSTS  AND  THEIR  FINANCING 

additional  taxes  to  make  good  the  decline  in  cus- 
toms duties.  Accordingly  the  so-called  "  emergency 
revenue  "  law  of  October  22,  1914,  was  enacted,  which 
the  Secretary  of  the  Treasury  estimated  would  bring 
in  $54,000,000  in  the  fiscal  year  1915  and  $44,000,000 
in  the  following  year.  This  was  to  run  until  December 
31,  1915,  but  as  it  was  obvious  before  that  date  arrived 
that  the  war  would  continue  much  longer,  it  was 
extended  by  joint  resolution  of  December  17,  1915,  for 
another  year.  On  the  whole,  this  Act  taxed  business 
rather  than  wealth,  for  it  imposed  special  taxes  on 
bankers,  brokers,  commission  merchants,  proprietors  of 
places  of  amusement,  and  tobacco  dealers,  as  well  as 
stamp  taxes  on  certain  legal  and  business  documents, 
on  tickets,  telephone  and  telegraph  messages,  insurance 
premiums,  perfumery  and  cosmetics,  and  chewing  gum. 
The  rate  on  fermented  liquors  was  raised  50  per  cent., 
and  new  taxes  were  imposed  on  wines,  artificially  car- 
bonated waters,  and  cordials.^ 

By  the  end  of  1915  it  was  evident  that  additional 
revenue  would  have  to  be  raised,  and  President  Wilson 
proposed  in  his  message  of  December  7  that  it  be  secured 
by  extending  the  list  of  articles  in  the  Emergency  Act 
and  by  expanding  the  internal  revenue  system.  Con- 
gress, however,  preferred  to  tax  wealth  rather  than 
industry  and  refused  to  carry  out  the  executive  pro- 
gram. The  President  recommended  an  increase  in  the 
surtaxes  on  incomes  and  a  lowering  of  the  exemp- 
tion, and  new  taxes  on  gasoline,  naphtha,  automobiles, 
internal-combustion  engines,  fabricated  iron  and  steel 
products,  pig  iron,  and  bank  checks.  But  Congress 
rejected  the  whole  plan  except  the  increases  in  the  sur- 

•  A  list  of  these  commodities,  together  with  the  rates  imposed 
upon  them  will  be  found  in  the  Appendix. 

268 


TAXATION  IN  THE  UNITED  STATES 

taxes  on  the  larger  incomes,  which  were  incorporated  in 
the  Act  of  September  8,  1916. 

It  had  become  evident  to  all,  however,  that  the 
European  War  would  continue  longer  than  had  been 
anticipated  and  that  a  more  permanent  and  lucrative 
tax  system  must  be  provided.  Moreover,  it  was  clear 
that  reliance  could  not  be  placed  upon  customs  duties, 
which  had  already  shown  a  considerable  falling  off,  for 
imports  would  undoubtedly  continue  to  be  restricted 
for  a  considerable  period,  not  only  during  the  war, 
but  even  after  peace  was  declared.  The  necessary 
revenues  must  therefore  be  raised  by  a  further  develop- 
ment of  internal  taxation.  The  answer  to  the  fiscal 
problem  thus  presented  was  given  by  Congress  in  the 
Revenue  Act  of  September  8,  1916,  which  was  designed 
especially  to  meet  the  extensive  Army  and  Navy  pro- 
gram of  August,  1916. 

The  debate  in  Congress  on  this  measure  was  compli- 
cated  by  the  fact  that  it  was  a  war  measure,  the  larger 
revenue  to  be  raised  being  necessitated  by  the  prepared- 
ness program.  But  in  spite  of  that  fact  there  was 
evidenced  in  the  discussion  a  determination  to  impose 
the  added  burden  upon  wealth  rather  than  upon  busi- 
ness or  upon  the  mass  of  the  people  through  consumption 
taxes.  As  typical  of  the  different  convictions  that  found 
expression,  three  or  four  speakers  may  be  quoted,  both 
in  opposition  to,  and  in  defense  of,  the  bill. 

Mr.  Collier  of  Mississippi  stated  the  Democratic 
position  as  follows :® 

We  have  to  raise  a  certain  amount  of  money  to  provide 
national  defense.  Only  one  question  presented  itself:  How 
can  this  be  raised  so  that  the  burden  ^^^I1  fall  lightest  upon 

•  Congressional  Record,  Ixiii,  p.  12136. 

269 


WAR  COSTS  AND  THEIR  FINANCING 

the  American  people?  We  have  done  this  by  increasing  the 
income  tax,  and  adding  the  inheritance  tax,  and  the  tax  on 
munitions. 

Said  Mr.  Keating  of  Colorado  :^ 

This  bill  provides  for  a  total  of  $225,000,000  of  new 
revenue,  and  not  one  dollar  of  that  vast  sum  will  be  raised 
by  a  tax  on  the  necessaries  of  life.  Every  dollar  will  come 
from  the  purses  of  those  who  are  most  capable  of  making 
tl  e  contribution  —  the  very  rich  men  of  the  country.  It 
was  not  until  the  advent  of  the  Wilson  Administration  that 
any  serious  attempt  was  made  to  equalize  the  burden  by 
compelling  wealth  to  bear  something  like  its  just  share. 

Mr.  Crisp  of  Georgia  argued  for  the  Act  in  a  similar 
strain  and  concluded  :^  ' '  The  bill  we  are  now  con- 
sidering raises  the  entire  amount  necessary  to  pay  the 
expenses  of  preparedness  from  the  wealth  of  the 
country. ' ' 

Perhaps  the  most  radical,  not  to  say  vindictive,  speech 
made  during  the  progress  of  the  debate  on  this  measure, 
was  one  by  Mr.  Bailey  of  Pennsylvania.^  In  spite  of 
mixed  metaphor  and  trite  phrases,  his  view  deserves 
attention  as  indicating  the  attitude  of  some,  at  least,  of 
the  supporters  of  the  Act.  According  to  him,  the  most 
important  feature  of  the  whole  bill  was  the  fact  that 
the  burden  of  the  war  expenditure  was  placed  on  those 
chiefly  responsible  for  promoting  war.  This  proceeded 
from  Wall  Street  and  from  those  whose  interests 
centered  there. 

They  have  done  the  dancing,  they  must  pay  the  piper.    .    .    . 
AVcalth  must  foot  the  bill.      .      .     .     This  is  something  new 
'Ibid.,  p.  12485. 
^Ihid.,  p.  12109. 
'Ibid.,  p.  12151. 

270 


TAXATION  IN  THE  UNITED  STATES 

under  the  sun.    .    .    .    Always  the  great  and  powerful  neither 

did  the  fighting  nor  paid  the  bill.     Both  fell  to  the  poor  and 

lowly.     For   once   the   program   had   been   changed. 

If     we    are     to    have     something    which     approximates     an 

evening-up  process,  there  will  be  occasion  for  philosophical 

satisfaction. 

Mr.  Hill  of  Connecticut,  wlio  opposed  the  Act, 
asserted  that  it  was  proposed  to  meet  the  expenses  of 
defense  by 

unloading  the  whole  of  this  additional  burden  by  a  doubled 
income  tax  upon  one-third  of  one  per  cent  of  our  population, 
and  in  another  form  upon  the  graves  of  the  dead,  and  the 
surviving  widows  and  orphans  .  .  .  and,  in  still  another 
form,  upon  carefully  selected  industries  which  you  think 
can  be  safely  plundered  and  with  good  results.  Is  it  not 
robbing  the  few  to  pay  the  equitable  obligation  of  the  many?^*^ 

It  is  evident  that  there  was  intended  in  this  Act  a 
definite  return  to  the  principle  of  taxing  wealth  which 
had  been  temporarily  superseded  by  the  business  taxes 
of  the  emergency  revenue  measure  of  October  22,  1914. 
The  Act  contained  six  titles,  covering  the  income  tax, 
estate  or  inheritance  tax,  munitions-manufacturers'  tax, 
miscellaneous  taxes,  dyestuffs,  and  printing  paper,  of 
which,  however,  only  the  first  four  were  revenue 
measui'es. 

The  income  tax  clause  of  the  Act  of  September  8, 
1916,  practically  repealed  the  former  law.  The  rate  of 
tl";e  normal  income  tax,  both  upon  individuals  and  upon 
corporations,  was  doubled,  being  increased  from  one 
por  cent,  to  two  per  cent.  At  the  same  time  the  addi- 
tional tax  rates  on  personal  incomes  over  $20,000  were 
raised,  and  a  somewhat  finer  classification  of  income 
f^^^oups  was   introduced.     The   corporation   income  tax 

"' Ihid.,  p.   12104. 

271 


WAR  COSTS  AND  THEIR  FINANCING 

was  doubled,  being  raised  from  one  per  cent,  to  two 
per  cent.  The  annexed  table  shows  the  rates  of  the 
surtaxes  on  personal  incomes  under  the  new  law : 

Incomes  Surtax,  per  cent. 

$20,000  to      $40,000 1 

40,000  to        00,000 2 

60,000  to        80,000 3 

80,000  to      100,000 4 

100,000  to      150,000 5 

150,000  to      200,000 6 

200,000  to      250  000 7 

250,000  to      300,000 8 

300,000  to      500,000 9 

500,000  to  1,000.000 10 

1,000  000  to  1,500.000 : 11 

1,500,000  to  2,000,000 12 

Over  $2,000,000 13 

The  tax  under  this  new  Act  began,  therefore,  with 
two  per  cent,  on  the  smaller  incomes  of  individuals, 
jumped  to  3  per  cent,  on  incomes  from  $20,000  to 
$40,000,  and  then  progressed  by  rather  uneven  incre- 
ments until  it  reached  a  maximum  of  15  per  cent, 
(normal  and  additional)  on  incomes  in  excess  of 
$2,000,000  a  year,  which  was  the  highest  rate  yet 
imposed  in  the  United  States. 

There  was  one  administrative  feature  common  to  this 
Act  and  the  earlier  Act  of  1913  which  should  be  noted 
at  this  point,  both  because  of  the  discussion  which  it 
aroused  and  because  of  the  fluctuation  in  policy  regard- 
ing it  which  characterized  the  subsequent  income  tax 
legislation.  This  was  the  so-called  '*  collection-at-the- 
source  "  provision  under  which  the  burden  was  placed 
upon  corporations,  associations  and  employers  who  should 
make  payments  to  any  taxpayer  in  excess  of  the  mini- 
mum exemption  of  deducting  the  amount  of  the  normal 
tax  from  such  excess  and  remitting  it  directly  to  the 

272 


TAXATION  IN  THE  UNITED  STATES 

Treasury.     The  collection-at-tlie-source  feature  greatly 
complicated  the  administrative  work. 

The  section  imposing  an  estate  or  inheritance  tax 
marked  a  new  departure  in  Federal  taxation.  Down  to 
this  time  inheritance  taxes  had  been  reserved  exclusively 
for  the  use  of  the  separate  states  and  42  of  them  were 
now  deriving  part  of  their  revenues  from  this  source. 
The  action  of  the  Federal  Government  in  encroaching 
upon  this  field  was  severely  criticized/^  but  the  need  for 
additional  revenue  and  the  desire  on  the  part  of  Congress 
to  tax  accumulated  wealth  more  heavily  led  to  the  selec- 
tion of  this  source.  The  Federal  inheritance  tax  estab- 
lished by  the  Act  of  September  8,  1916,  was  levied  on 
the  entire  value  of  the  net  estate,  not  upon  the  dis- 
tributive shares,  a  method  which  made  the  actual  rates 
heavier  than  they  appear  at  first  glance,  for  there  were 
none  of  the  various  deductions  allowed  under  the  state 
inheritance  tax  laws.  On  the  other  hand,  such  a  pro- 
vision greatly  simplified  the  administration.  An 
exemption  of  $50,000  might  be  deducted  in  estimating 
the  value  of  the  net  estate,  and  various  other  deductions 
were  allowed  for  funeral  expenses,  support  of  depend- 
ents during  the  settlement  of  the  estate,  and  similar 
charges.  The  tax  must  be  paid  within  a  year  or  the 
assets  might  be  sold  to  pay  the  tax.  The  rates  estab- 
lished from  time  to  time  applied  only  to  estates  created 
by  death  after  that  date.  The  tax  was  progressive 
according  to  amount  but  not  according  to  kinship,  as 
was  usual  under  the  state  inheritance  tax  laws.  The 
accompanying  table  shows  the  rates  of  the  Federal  estate 
tax  of  September  8,  1916,  on  net  estates  above  the 
exemption  of  $50,000: 

"  See,  for  example,  the  paper;?  on  Federal  taxation  of  inheritances 
read  at  the  annual  conferences  of  the  National  Tax  Association. 

273 


WAR  COSTS  AND  THEIR  FINANCING 

Net  Taxable  Estate  Rate,  per  cent. 

Not  exceeding  $50,000 1 

$50,000  to      150.000 2 

150,000  to     250,000 3 

250,000  to      450,000 4 

450,000  to  1,000,000 5 

1,000,000  to  2,000,000 6 

2.000,000  to  3.000,000 7 

3,000,000  to  4,000,000 8 

4,000.000  to  5,000.000 9 

5,000,000  and  over 10 

Owing  to  administrative  difficulties  in  checking  estates, 
allowance  of  claims  necessary  before  net  estate  could  be 
determined,  and  other  delays,  this  tax  yielded  only  a 
comparatively  small  amount  of  revenue.  For  the  last 
three  months  of  the  calendar  year  1916  the  revenue 
from  this  source  amounted  to  $6,828,643. 

A  new  feature  in  American  finance  introduced  by 
this  Act  was  the  imposition  of  tlie  munitions-manufac- 
turers' tax  in  addition  to  tlie  income  tax.  This  was  an 
excise  tax  upon  corporate  and  individual  manufacturers 
of  war  munitions  of  121/2  per  cent,  of  the  entire  profits 
from  the  sale  of  such  articles  manufactured  within  the 
United  States  for  the  calendar  year  1916  and  thereafter 
until  one  year  after  the  proclamation  of  peace.  It  was 
superseded  the  following  year  by  the  Act  of  October  3, 
1917,  which  reduced  the  rate  to  10  per  cent,  for  the  year 
1917  and  provided  that  it  should  cease  to  be  effective 
on  January  1,  1918.  This  tax  was  the  first  application 
of  the  war  profits  tax,  which  w'as  later  to  be  expanded 
so  as  to  include  profits  from  all  war  contracts.  For  the 
year  1916  returns  were  made  by  498  firms,  of  which 
269  were  found  to  be  taxable.  The  tax  revenue  from 
these  amounted  to  $27,663,929.  For  the  year  1918  the 
revenue  amounted  to  $13,296,927.  The  tax  was  a  dis- 
appointment as  a  revenue  producer,  owing  chiefly  to  the 

274 


TAXATION  IN  THE  UNITED  STATES 

liberal  allowances  that  were  madu  for  depreciation.  As 
the  duration  of  the  war  was  uncertain,  a  large  amount 
of .  the  capital  investment  for  expansion  of  existing 
plants  or  the  building  of  new  ones  was  charged  up 
against  costs.  This  rendered  taxable  profits  much  smaller 
than  would  have  been  the  case  in  a  normal  business  and 
accounts  for  the  large  number  of  exemptions  of  firms 
which  made  returns. 

The  fourth  title  of  the  Act  of  September  8,  1916, 
raised  the  taxes  on  wines  and  imposed  special  excise 
taxes  on  manufacturers  of  tobacco,  cigars,  and  cigarettes, 
ship  brokers,  and  corporate  capitalization.  The  special 
corporation  excise  tax  was  50  cents  for  each  $1,000  of 
the  "  fair  value  "  of  the  capital  stock,  but  a  deduction 
of  $99,000  of  capitalization  was  allowed.  The  so-called 
war  revenue  taxes  levied  under  the  emergency  Act  of 
October  22,  191-1,  were  repealed. 

Within  six  months  after  the  Act  of  September  8,  1916, 
was  passed,  it  was  amended.  On  February  1,  1917, 
diplomatic  relations  with  Germany  were  severed,  and 
it  appeared  probable  that  war  would  follow,  if  no  change 
were  made  by  Germany  in  her  submarine  warfare.  It 
became  necessary,  therefore,  to  provide  adequate 
revenues  for  all  eventualities.  The  Act  of  March  3,  1917, 
was  accordingly  passed,  which  bore  the  significant  title, 
"  An  Act  To  provide  increased  revenue  to  defray  the 
expenses  of  the  increased  appropriations  for  the  Army 
and  Navy  and  the  extension  of  fortifications  and  for 
other  purposes." 

A  novel  and  important  feature  of  this  Act  was  the 
segregation  of  the  larger  i)art  of  the  revenues  to  bo 
raised  under  its  provisions  for  the  purposes  named  in 
the  title  and  for  no  other.     Preparedness  was  thus  to 

275 


V^ 


WAR  COSTS  AND  THEIR  FINANCING 

be  financed  by  the  taxes  provided  for.  The  first  of  these 
was  the  excess  profits  tax,  which  was  levied  in  addition 
to  existing  taxes  upon  the  net  incomes  of  all  corpora- 
tions and  partnerships  having  an  income  of  more  than 
$5,000,  such  tax  to  be  at  the  rate  of  eight  per  cent,  per 
annum  upon  the  profits  in  excess  of  eight  per  cent.  As 
the  rate  of  the  existing  corporation  income  tax  was  two 
per  cent,  on  the  net  income,  a  corporation  whose  profits 
exceeded  eight  per  cent,  for  the  year  and  were  not 
less  than  $5,000  w^ould  be  subject  to  a  combined  tax 
of  10  per  cent.  The  Act  was  made  effective  from  Janu- 
ary 1,  1917,  but  because  of  the  short  time  intervening 
between  the  date  of  approval  of  the  Act  and  the  end  of 
the  fiscal  year,  the  entire  amount  of  revenue  collected 
under  its  provisions  by  June  30  amounted  to  only 
$2,953.  This  Act  was  superseded  by  that  of  October  3, 
1917,  which  was  made  to  apply  to  the  whole  calendar 
year  1917. 

The  rates  of  the  estate  and  inheritance  taxes  pre- 
scribed by  the  Act  of  September  8,  1916,  were  increased 
50  per  cent,  under  the  Act  of  March  3,  1917.  The  rates 
therefore  ran  from  II/2  per  cent,  on  net  estates  not 
exceeding  $50,000  up  to  15  per  cent,  on  estates  in 
excess  of  $5,000,000,  The  revenue  collected  under  this 
Act  for  the  year  1917  amounted  to  $47,452,879. 

On  April  6,  1917,  Congress  declared  that  because  of 
repeated  acts  of  aggression  on  the  part  of  Germany, 
a  state  of  war  existed  between  that  country  and  the 
United  States.  The  immediate  needs  of  the  Treasury 
for  war  purposes  were  met  by  issues  of  certificates  of 
indebtedness  and  by  the  flotation  of  the  First  Liberty 
Loan,  but  Congress  at  once  set  to  work  to  frame  a 
revenue  measure  that  would  bring  in  returns  adequate 

276 


TAXATION  IN  THE  UNITED  STATES 

to  finance  the  war  costs  whicli  the  United  States  had 
assumed.  The  War  Revenue  Act  of  October  3,  1917, 
which  was  passed  to  provide  the  necessary  reveiuies,  was 
estimated  to  yield  $3,400,000,000  for  the  fiscal  year 
ending  June  30,  1918.^-  The  actual  yield  for  the  fiscal 
year  in  which  it  was  enacted  was  $3,696,043,485.^^  This 
Act  contained  some  12  titles,  the  most  important  of 
which  were  those  dealing  with  the  income  and  the 
excess  profits  taxes,  though  resort  was  now  had  on  a 
considerable  scale  to  internal  revenue  and  excise  taxes. 
On  the  whole,  however,  the  burden  of  the  new  revenue 
law  took  the  form  of  direct  taxation,  rather  than  of 
indirect.^* 

The  income  tax  provisions  left  the  Act  of  September 
8,  1916,  in  full  force,  and  in  addition  imposed  new  rates, 
so  that  the  total  tax  to  which  the  income  taxpayer  under 
the  new  Act  was  liable  was  a  combination  of  two  rates. 
Exemptions  under  the  new  law  were  $1,000  for  single 
persons  and  $2,000  for  married.  An  additional  exemp- 
tion of  $200  was  allowed  for  each  dependent  child.  The 
normal  tax,  which  applied  to  all  net  incomes  abovx3  the 
exemption,  was  two  per  cent,  under  the  new  law,  and 
was  in  addition  to  the  normal  tax  under  the  old  law; 
thus  the  normal  tax  on  an  unmarried  person  without 
dependents  was  two  per  cent,  on  income  above  $1,000 
and  under  $3,000,  and  four  per  cent,  on  all  income 
above  $3,000.  Considerable  unnecessary  complications 
and  confusion  were  occasioned  by  this  superimposition 
of  the  war  income  tax  upon  the  former  income  tax, 
instead  of  combining  them  into  one  single  tax.     T'  e 

^-Report  of  the  Secretary  of  the  Treasury,   1017,  p.  71. 

"/6i(?.,   1918.  p.  126. 

"  Indirect  taxes  yielded  the  following  proportion  of  total  tax 
revenues:  89  per  cent,  in  the  fiscal  year  1914,  60  per  cent,  in 
1917,  and  24  per  cent,  in  1918. 

277 


WAR  COSTS  AND  THEIR  FINANCING 

reason  may  possibly  have  been  the  belief  on  the  part 
of  Congress  that  the  war  income  tax  was  only  a 
temporary  measure  and  that  it  could  later  be  repealed 
without  disturbing  the  existing  rates. 

As  a  result  of  much  agitation,  the  so-called  method 
of  "  information  at  the  source  "  was  substituted  for 
"  collection  at  the  source  "  in  cases  where  payments 
above  the  tax-exempt  minimum  were  involved.  Collec- 
tion at  the  source,  however,  continued  to  apply  to  non- 
resident aliens. 

In  addition  to  the  normal  tax,  surtaxes  were  imposed 
upon  all  net  incomes  over  $5,000,  which  were  levied  in 
addition  to  those  provided  for  under  the  Act  of 
September  8,  1916.  The  combined  rates,  therefore, 
ranged  from  one  per  cent,  on  net  incomes  between  $5,000 
and  $7,500  up  to  63  per  cent,  on  incomes  over  $2,000,000. 
The  rates  on  the  various  income  groups  are  shown  below : 


Law  of 

Law  of 

Surtax  on  net  income 

September 

October 

Total 

between — 

8,  1916, 

3,  1917, 

surtax, 

per  cent. 

per  cent. 

per  cent. 

S  5,000  and         $7,500 

None 

1 

1 

7,500  and          10,000 

None 

2 

2 

10,000  and         12,500 

None 

3 

3 

12,500  and         15,000 

None 

4 

4 

15,000  and         20,000 

None 

5 

5 

20,000  and         40,000 

1 

7 

8 

40,000  and         60,000 

2 

10 

12 

60,000  and         80,000 

3 

14 

17 

80,000  and       100,000 

4 

18 

22 

100,000  and       150,000 

5 

22 

27 

150,000  and       200,000 

6 

25 

31 

200,000  and       250,000 

7 

30 

37 

250,000  and       300,000 

8 

34 

42 

300,000  and        500,000 

9 

37 

46 

500,000  and       750,000 

10 

40 

50 

750,000  and    1,000,000 

10 

45 

55 

1,000.000  and     1,500,000 

11 

50 

61 

1,500,000  and    2,000,000 

12 

50 

62 

Over  $2,000,000 

13 

50 

63 

278 


TAXATION  IN  THE  UNITED  STATES 

It  will  be  seen  that  as  a  result  of  these  changes  ti.e 
mininuim  exemption  limit  was  considerably  reduced, 
though  it  still  stood  far  above  the  minimum  exemption 
permitted  under  the  income  tax  laws  of  any  other  coun- 
try. At  the  same  time  the  rate  of  the  normal  tax  was 
doubled.  But  perhaps  the  most  important  change,  and 
the  one  which  most  affected  the  revenue  producing 
character  of  the  law,  was  the  changes  that  were  made  in 
the  surtaxes.  The  minimum  income  subjected  to  the 
surtax  was  reduced  from  $20,000  to  $5,000,  which, 
according  to  the  tax  returns  of  the  preceding  year,  must 
have  subjected  something  over  200,000  taxpayers  to  the 
operation  of  the  surtaxes.  The.se  changes  constituted 
a  material  improvement,  for  the  tax  was  now  no  longer 
confined  to  a  small  group  of  wealthy  taxpayers,  but 
reached  down  into  the  lower  income  groups.  At  the 
same  time,  the  progression  of  the  rates  was  tremendously 
steepened,  so  that  the  highest  rate  on  incomes  over 
$2,000,000,  which  under  the  old  law  had  been  13  per 
cent.,  was  now  made  50  per  cent,  under  the  new  law, 
thus  giving  a  combined  rate  on  the  larger  incomes  of 
63  per  cent.  As  a  result  of  these  changes,  the  income 
tax  had  become  a  real  war  income  tax. 

The  rates  of  the  surtax  were  now  the  highest  levied 
in  any  country  in  the  world,  but  their  severity  was 
greatly  mitigated  by  the  exemptions  granted  under  the 
various  Bond  Acts  and  the  constitutional  provisions 
controlling  the  taxation  of  state  and  municipal  bonds 
in  the  United  States.  The  result  was  that  the  amount 
of  taxable  income  that  a  given  individual  possessed  was 
determined  not  merely  by  its  size,  but  also  by  its  char- 
acter. The  purpose  of  Congress  to  have  the  rates 
progress  according  to  amount  of  income  was,  therefore, 
partially  defeated,  or  at  any  rate  rendered  uncertain. 

279 


WAR  COSTS  AND  THEIR  FINANCING 

Although  this  was  a  defect  resulting  from  the  exemption 
of  bonds  from  taxation,  the  application  of  the  principle 
of  progression  was  sound  from  the  point  of  view  both 
of  justice  and  of  obtaining  the  largest  possible  amount 
of  revenue.  If  use  was  to  be  made  primarily  of  direct 
taxation  for  war  purposes,  it  was  evident  that  great 
reliance  would  have  to  be  placed  upon  the  income  tax. 
The  war  excess  profits  tax  formed,  together  with  the 
income  tax,  the  bulwark  of  revenue  during  the  war.'^ 
The  tax  imposed  by  the  Act  of  October  3,  1917,  super- 
seded that  of  the  previous  law  of  March  3;  it  levied 
a  tax  upon  the  income  of  every  corporation,  partnership, 
and  individual,  and  applied  to  all  trades,  businesses  and 
occupations  with  certain  specified  exceptions.  The  tax 
was  levied  for  each  taxable  year  upon  the  net  income  in 
excess  of  a  certain  deduction  at  the  following  rates: 

Excess  Profits  Tax    (Act  of  October  3,  1917) 
If  profits  from  invested  capital  Rate  on  Taxable 

above  deductions  are  Net  Income  is 

Below   15  per  cent 20  per  cent, 

15  to  20  per  cent 25  per  cent. 

20  to  25  per  cent 35  per  cent. 

25  to  33  per  cent 45  per  cent. 

Over  33  per  cent 60  per  cent. 

The  taxable  year  was  defined  to  be  12  months  ending 
December  31,  1917,  and  each  calendar  year  thereafter, 
or  the  fiscal  year  of  the  taxpayer.  The  pre-war  period 
included  the  calendar  years  1911  to  1913,  or  as  many  of 
them  as  the  taxpayer  was  engaged  in  business.  The 
deduction  from  net  income  was  carefully  defined,  and 
was  differentiated  for  the  three  cases  of  (1)  a  domestic 
resident  taxpayer  in  business  during  the  whole  pre-war 

^'^  The  income  and  excess  profits  taxes  constituted  44.4  per  cent, 
of  the  entire  collections  of  internal  revenue  in  1917,  and  76.8  per 
cent,  in  1918  (Report  of  the  Secretary  of  the  Treasury,  1918, 
p.  371). 

280 


TAXATION  IN  THE  UNITED  STATES 

period;  (2)  one  in  business  during  a  part  only  of  the 
pre-war  period;  and  (3)  a  foreign  or  non-resident  tax- 
payer. In  the  first  case  the  deduction  consisted  of 
between  se^'^en  and  nine  per  cent,  of  the  invested  capital 
plus  $3,000  in  the  case  of  a  domestic  corporation  and 
$6,000  in  the  case  of  a  domestic  pai'tnership  or  indi- 
vidual. In  the  second  case  the  percentage  was  fixed  at 
eight  per  cent,  and  the  lump-sum  exemption  remained 
the  same.  In  the  third  case  the  exemption  was  the 
same  as  for  the  domestic  corporation  or  individual  but 
without  the  lump-sum  exemption.  In  the  case  of  a  trade 
or  business  having  no  invested  capital,  or  not  more  than 
a  nominal  capital,  there  was  a  flat  tax  of  eight  per  cent, 
of  the  net  income  in  excess  of  $3,000  in  the  case  of  a 
domestic  corporation  and  $6,000  in- the  case  of  a  domestic 
partnership  or  resident  of  the  United  States.  Net 
income  and  invested  capital  were  further  defined. 

The  excess-profits  tax  proved  a  great  fiscal  success, 
the  1917  yield  as  shown  in  the  returns  for  the  year 
ending  June  30,  1918,  being  as  follows : 


Individual  excess  profits  tax $88,731,080 

Partnership   excess   profits   tax 03,125.653 

Corporate  excess  profits  tax 2.045,7 13. 085 


Total $2,227,569,818 

In  commenting  upon  this  tax  the  Committee  on  War 
Finance  of  the  American  Economic  Association^''  made 
the  following  observation : 

At  a  time  when  revenue  was  a  jiaraniount  consideration, 
this  result  is  greatlj^  to  the  credit  of  the  tax,  and,  considered 
in  a  broad  way,  is  ample  justification  of  its  enactment.     When 

"  Report,  printed  as  Supplement  No.  2  of  the  American 
Economic  Review,  March,  1019.  p.  15. 

281 


WAR  COSTS  AND  THEIR  FINANCING 

tliis  is  said,  however,  praise  must  eud,  and  criticism  begin; 
for  it  appears  certain  that  the  success  of  the  tax  was  due 
not  so  much  to  the  manner  in  which  the  law  was  drawn,  as 
to  the  skill  and  good  judgment  of  the  internal  revenue  depart- 
ment in  administering  the  Act  and  to  the  loyalty  of  the  tax- 
payers in  complying  as  best  they  could  with  the  crude,  obscure 
and,  in  many  ways,  harsh  and  unequal  revenvie  measure. 

The  criticisms  contained  in  this  valuable  report  were 
admirably  summed  up  by  the  chairman  of  the  committee, 
and  from  his  summary  the  following  brief  extract  may 
be  quoted  :^'^ 

The  law  undertook  to  levy  the  tax  at  rates  varying  with 
the  percentage  which  the  taxable  income  bears  to  the  invested 
capital.  Statistics  show,  as  might  have  been  expected,  that 
the  tax  collected  bore  no  necessary  relation  to  war  profits, 
and  imposed  much  heavier  rates  upon  small,  than  upon  large, 
concerns.  .  .  .  Great  difficulties  have  been  encountered 
in  administering  the  present  law  in  defining  invested  capital, 
esiJeeially  in  connection  with  capital  invested  in  nontaxable 
securities;  in  the  case  of  borrowed  capital  in  cases  where 
corporations  had  issued  stock  for  the  j^urchase  of  tangible 
property;  in  connection  with  value  of  good  will,  and  in  the 
provision  made  for  patents  and  copj^rights.  In  the  definition 
of  income  also,  several  difficulties  have  risen,  especially  in 
connection  with  the  limitation  of  deductions,  on  account  of 
salaries  actually  paid  in  the  case  of  profits  which  fluctuate 
from  year  to  year;  in  the  case  of  industry  carried  on  with 
differerft  degrees  of  risk  and  different  degrees  of  stability, 
and  in  the  case  of  net  income  in  excess  of  the  specific 
exemptions.  Other  great  difficulties  appeared  in  connection 
with  the  determination  of  nominal  capital.  In  fact,  had  it 
not  been  for  the  administrative  discretion  exercised  by  the 
internal  revenue  department  which  went  to  the  extreme  limit, 
and  perhaps  even  transcended  the  limit,  in  interpreting  the 
law,  the  results  would  have  been  far  more  unsatisfactory 
than  was  actually  the  case. 

"Ibid.,  p.  120. 

282 


TAXATION  IN  THE  UNITED  STATES 

The  war  estate  or  inheritance  tax  was  contained  in  the 
ninth  title  of  tlie  Act,  hut  may  best  be  described  with 
the  two  foregoing  taxes,  as  it  was  a  direct  tax  and  fell 
upon  lai'ge  wealth.  It  was  superimposed  upon  the 
estate  tax  of  the  Act  of  September  8,  1916,  as  amended 
by  the  Act  of  March  3,  1917,  in  the  same  way  as  the 
income  tax  was  superimposed  upon  the  earlier  one.  It 
will  be  remembered  that  the  original  Act  had  levied  a 
tax  ranging  from  one  per  cent,  on  net  estates  not  in 
excess  of  $50,000  to  10  per  cent,  on  esta.tes  in  excess 
of  $5,000,000,  and  that  these  rates  had  been  increased 
50  per  cent,  by  the  Act  of  March  3,  1917.  A  similar 
addition  was  now  decreed  by  this  measure,  so  that  the 
total  rates  were  double  those  of  the  original  law.  But 
in  addition  to  this,  three  new  groups  were  added  at  the 
top  of  the  list  upon  which  still  higher  rates  were 
imposed,  so  that  as  the  law  finally  stood,  the  highest 
rate  was  25  per  cent,  on  estates  over  $10,000,000.  The 
original  exemption  of  $50,000  was  continued  in  this 
Act.  The  combined  rates  as  they  stood  after  the  passage 
of  the  law  of  October  3,  1917,  were  as  follows : 

Inheritance  Tax,  Act  of  October  3,  1917 

Net  Taxable  Estate  Total  Rate,  per  cent. 

Under  $50.000 2 

$50,000    to         150.000 4 

150.000   to         250.000 6 

250.000   to         450.000 8 

450.000   to      1.000.000 10 

1,000.000   to     2.000.000 12 

2.000.000    to      3.000.000 14 

3.000.000    to      4.000.000 16 

4.000.000    to      5.000.000 18 

5.000.000    to      8.000.000 20 

8,000.000    to    10.000,000 22 

Over   10,000,000    25 

The  Act  went  into  effect  immediately  upon  its  passage, 

283 


WAR  COSTS  AND  THEIR  FINANCING 

so  that  the  revenues  derived  during  the  calendar  year 
1917  from  the  Federal  estate  tax  were  obtained  under 
three  separate  enactments.  It  is  not  possible  to  trace 
the  effects  of  changes  in  legislation  upon  the  yield,  but 
the  total  revenues  from  this  source  for  the  year  aggre- 
gated $47,452,879. 

Titles  III  and  IV  of  the  Act  provided  for  increased 
taxes  on  beverages  and  tobacco.  The  rates  on  distilled 
spirits  were  increased  from  $1.10  per  gallon  to  $3.20 
when  used  for  beverage  purposes  and  $2.20  when  used 
for  other  purposes.  The  rates  on  beer  and  wine  were 
doubled,  and  new  taxes  were  laid  upon  soft  drinks. 
Instead  of  a  fiat  rate  of  $3.00  per  thousand  on  cigars, 
a  progressive  scale  was  introduced  which  was  graduated 
according  to  the  selling  price.  The  rates  on  cigarettes 
and  manufactured  tobacco  were  also  considerably 
increased.  In  view  of  the  needs  of  the  Treasury,  the 
advances  in  the  rates  on  these  articles,  which  had  the 
advantage  of  being  semi-luxuries  and  of  yielding  very 
large  returns,  must  be  regarded  as  very  moderate.  The 
result  of  the  increases,  as  shown  in  the  receipts  for  the 
fiscal  year  ending  June  30,  U918,  was  an  increase  from 
$387,000,000  to  $600,000,000  in  the  revenues  from 
liquors  and  tobacco. 

A  new  set  of  taxes  was  provided  for  in  the  next 
section  of  the  Act,  namely,  war  taxes  on  facilities 
furnished  by  public  utilities  and  insurance.  These  con- 
sisted of  taxes  varying  from  three  to  10  per  cent,  on 
freight  charges,  passenger  fares,  Pullman  tickets,  and 
pipe-line  transportation,  and  of  stamp  taxes  ranging 
from  one  cent  on  express  packages  to  five  cents  on  tele- 
graph and  telephone  messages.  Taxes  on  fire,  marine, 
and  casualty  insurance  of  one  cent  per  $1  of  premium, 
and  on  life  insurance  of  eight  cents  per  $100  of  policy, 

284 


TAXATION  IN  THE  UNITED  STATES 

were  also  levied.  Excise  taxes,  too,  were  imposed  upon  a 
number  of  articles  of  luxury;  these  paralleled  very 
closely  the  English  procedure  along  this  line,  the  purpose 
of  which  was  not  merely  to  fill  the  Treasury,  but  also 
to  curtail  extravagance  and  useless  expenditure.  They 
covered  automobiles,  automobile  trucks,  and  motorcycles, 
musical  instruments,  motion-picture  films,  jewelry, 
sporting  goods,  patent  medicines,  perfumes,  cosmetics 
and  toilet  preparations,  chewing  gum,  cameras,  and 
boats  and  yachts.  These  were  really  excise  taxes  levied 
upon  the  manufacturer  or  importer;  for  the  most  part 
they  amounted  to  between  two  and  three  per  cent,  of 
the  price. 

The  growing  popularity  of  motion-picture  shows  was 
probably  responsible  for  the  inclusion  within  this  Act 
of  a  war  tax  on  admissions  and  dues,  both  of  which 
were  new  as  Federal  taxes  in  the  United  States.  A  tax 
on  admissions  of  one  cent  for  every  10-cent  charge  was 
imposed.  Club  dues  were  also  taxed  10  per  cent,  if  in 
excess  of  $12  a  year.  The  stamp  taxes  provided  for  in 
the  Act  of  October  22,  1911,  were  practically  reenacted. 
The  rate  on  inlaying  cards,  however,  was  raised  from 
two  cents  to  seven  cents,  and  a  new  tax  of  one  cent 
for  each  25-cent  charge  was  imposed  on  parcel-post 
packages. 

The  yield  from  all  of  the  various  taxes  just  enumer- 
ated amounted  to  $952,000,000  for  the  fiscal  year  1918, 
which  was  an  increase  of  $311,000,000,  or  33  per  cent., 
over  the  preceding  year.  This  increase  was  in  spite  of 
a  fall  of  $46,000,000  in  customs  duties.  It  may  be 
pointed  out  in  this  connection  that  no  attempt  had  as 
yet  been  made  to  impose  any  taxes  upon  the  more  neces- 
sary articles  of  general  consumption  among  the  masses, 
such  as  tea,  coffee,  cocoa,  sugar,  and  similar  articles. 

285 


WAR  COSTS  AND  THEIR  FINANCING 

The  expenditures  of  the  United  States  for  the  month 
of  October,  1917,  that  in  which  the  Revenue  Act  was 
passed,  amounted  to  $465,000,000.  From  this  time  on, 
as  the  military  operations  expanded,  the  expenditures 
increased  at  an  extraordinarily  rapid  rate  and  far  out- 
ran the  revenue  capacity  of  the  tax  measures.  By 
September,  1918,  the  monthly  expenditures  were 
$1,625,000,000,  or  almost  four  times  as  great  as  they 
had  been  a  year  before.  If  the  Treasury  policy  of 
paying  a  proportion  of  approximately  one-third  of  the 
expenditures  out  of  tajses  was  to  be  continued,  it  was 
evident  that  new  sources  of  revenues  must  be  tapped 
and  old  ones  made  more  lucrative.  The  tax  revenues 
amounted  to  no  more  than  $4,173,800,000  for  the  year 
ending  June  30,  1918. 

In  May,  President  Wilson  urged  the  matter  upon  the 
attention  of  Congress,  and  in  June  the  Secretary  of 
the  Treasury,  in  a  letter  to  Claude  Kitchin,  Chairman 
of  the  House  Committee  on  Ways  and  Means,  stated 
that  the  expenditures  for  the  coming  fiscal  year  would 
probably  amount  to  $24,000,000,000,  and  suggested  that 
one-third  of  this  amount  should  be  provided  for  out  of 
revenue.  In  accordance  with  this  suggestion,  a  bill 
was  presented  to  the  House  of  Representatives  on  Sep- 
tember 3,  1918,  which  it  was  estimated  would  raise  this 
amount.  The  bill  was  promptly  passed  by  the  House, 
but  while  it  was  under  consideration  by  the  Senate 
Committee  on  Finance,  hostilities  were  brought  to  an 
abrupt  close  by  the  signing  of  the  Armistice  on  Novem- 
ber 11.  As  a  result  of  this  event,  the  estimates  of 
expenditures  of  the  Government  were  reduced  from 
$24,000,000,000  to  $18,000,000,000  for  the  fiscal  year, 
and  the  taxes  provided  for  under  the  new  Act  were 
therefore  cut  down  from  $8,000,000,000  to  $6,000,000,- 

286 


TAXATION  IN  THE  UNITED  STATES 

000,  still  preserving  the  ratio  of  oue-tliird.  "  Taxes 
which  can  be  easily  borne  amid  the  feverish  activity 
and  patriotic  fervor  of  war  times  are  neither  so  welcome 
nor  so  easily  sustained  amid  the  uncertainties,  the 
depreciating  inventories,  and  the  falling  market  which 
are  apt  to  mark  the  approach  of  peace,"  said  Senator 
Simmons,  the  Chairman  of  the  Committee  on  Finance,  in 
reporting  the  bill  to  the  Senate  on  December  6,  1918. 

Owing  to  the  military  and  political  changes  which 
occurred  while  the  bill  was  under  consideration  and  to 
party  differences  in  the  two  houses  of  Congress,  the  bill 
did  not  become  law  until  February  24,  1919.  In  spite 
of  the  date  of  its  final  enactment,  however,  the  measure 
is  officially  known  as  the  "  Revenue  Act  of  1918."  As 
finally  enacted,  the  law  provided  for  raising  about 
$6,000,000,000,  of  which  about  four-fifths  was  to  be 
derived  from  income,  war  excess  profits,  and  estate 
taxes,  and  the  remainder  from  indirect  taxes  which  fell 
for  the  most  part  upon  luxuries  and  semi-luxuries.  Few 
new  sources  of  revenue  were  added  to  the  list  comprised 
in  the  earlier  Acts.  The  Act  of  February  24,  1919, 
practically  codified  the  earlier  measures,  repealing 
their  revenue  sections,^*  and  introducing  numerous 
amendments. 

The  changes  made  in  the  income  tax  were  numerous 
and  drastic.  The  exemptions  remained  as  they  had  been 
under  the  law  of  October  3,  1917,  at  $1,000  for  a  single 
person  and  $2,000  for  a  married  person,  together  with 
$200  for  each  dependent  person.  The  rate  of  the  normal 
tax  was  fixed  at  12  per  cent,  on  the  net  income  in  excess 
of  the  exemption  except  that  in  the  case  of  a  citizen  or 
resident  of  the  United  States  the  rate  on  the  first  $4,000 
of  such  excess  was  six  per  cent.     These  rates  applied 

"Section   1400. 

287 


WAR  COSTS  AND  THEIR  FINANCING 

only  to  the  calendar  year  1918 ;  for  subsequent  yeaj-s  the 
rates  were  fixed  at  eight  and  four  per  cent,  respectively. 
There  was  thus  provided  a  certain  element  of  progression 
in  the  normal  tax  which  was  designed  to  ease  the  burden 
to  the  small  income  receivers  with  less  than  $5,000  or 
$6,000.  Even  with  this  allowance  the  new  rates  repre- 
sented a  notable  increase  over  those  of  the  previous 
laws. 

The  changes  introduced  in  the  surtaxes  provided  for 
a  finer  classification  of  income  groups  and  less  abrupt 
jumps  in  the  rates  than  had  existed  under  the  previous 
Act.  The  point  at  which  the  surtaxes  were  first  applied 
remained  the  same,  namely,  $5,000;  from  one  per  cent, 
on  incomes  of  this  size  the  rates  progressed  very 
steadily,  at  the  rate  of  one  per  cent,  on  each  additional 
$2,000,  on  incomes  up  to  $100,000,  after  which  the 
progression  was  less  regular,  reaching  a  maximum  of 
65  per  cent,  on  incomes  over  $1,000,000.  Under  the 
previous  rate  the  highest  surtax  had  been  63  per  cent, 
on  incomes  over  $2,000,000.  These  changes  must  be 
regarded  as  a  great  improvement  from  the  point  of  view 
of  a  scientific  and  equitable  adjustment  of  rates,  as 
well  as  from  the  point  of  view  of  lucrativeness.^^ 

The  income  tax  on  corporations  was  fixed  at  12  per 
cent,  for  the  calendar  year  1918  and  at  10  per  cent,  for 
subsequent  years,  on  the  net  income  in  excess  of  the 
credits  allowed.  These  credits  comprised  (1)  the  amount 
received  as  interest  upon  obligations  of  the  United 
States;  (2)  the  amount  of  excess  profits  taxes  imposed 
under  this  same  Act;  and  (3)  in  the  case  of  a  domestic 
corporation,  $2,000  additional. 

The  rates  provided  for  under  this  Act  were  made  to 

"  A  table  of  rates  and  of  income  groups  will  be  found  in 
Appendix. 

288 


TAXATION  IN  THE  UNITED  STATES 

apply  to  incomes  received  during  the  year  1918.  In  con- 
sideration of  the  fact  that  the  rates  were  so  high  and 
that  the  payments  under  this  law  would  be  so  hea^y,  the 
Treasury  for  the  first  time  adopted  the  sensible  pro- 
cedure of  permitting  the  income  tax  to  be  paid  in  four 
quarterly  installments,  of  which  the  first  fell  due  in 
]\Iarch  and  the  second  in  June.  Final  statistics  of  the 
yield  from  the  income  and  excess  profits  taxes  for  1919 
and  1920  have  not  yet  been  published,  but  the  follow- 
ing are  the  preliminary  estimates  of  the  Treasury 
Department  for  tliese  two  years,  together  ^^dth  the 
actual  returns  from  these  two  sources  for  the  fiscal 
year  1918 : 

Income  and  Excess  Profits  Taxes,  1918-1920 


Individual  income 
tax 

Corporation  in- 
come tax 

Excess  profits  tax 


1918 


$615,008,503 
48,175.985 


$663,184,488 


1919^ 


$901,000,000 

400,000,000 
1,300,000,000 


1,601,000,000 


1920=' 


$1,400,000,000 

650,000,000 
1,700,000,000 


i, 750, 000, 000 


*The  actual  receipts  of  the  Treasury  were  greater  than  these 
figures  owing  to  the  payment  in  these  years  of  back  taxes. 


The  1919  Act  greatly  changed  and  distinctly  improved 
the  excess  profits  tax.  In  this  measure  it  was  styled 
"  war  profits  and  excess  profits  "  tax,  and  a  distinction 
between  war  profits  and  excess  profits  was  established. 
Individuals  and  partnerships  were  relieved  from  the 
excess  profits  tax,  and  the  Act  also  permitted  deduction 
of  losses  in  transactions  not  directly  connected  with 
.    289 


WAR  COSTS  AND  THEIR  FINANCING 

trade  or  business  and  removed  the  limitation  upon  the 
deduction  of  interest  upon  indebtedness.  As  in  the 
former  Act,  invested  capital  formed  the  basis  of  all 
computation.  More  careful  definitions  were  given  of 
such  terms  as  "  net  income,"  "  invested  capital," 
"  tangible  and  intangible  property,"  "  inadmissible 
assets,"  and  special  provision  was  made  for  exceptional 
cases,  for  reorganizations,  and  for  difficulties  in  inter- 
preting the  law.  After  invested  capital  was  determined, 
net  incomes  must  be  calculated  according  to  prescribed 
rules. 

Excess  profits  and  war  profits  were  differentiated  and 
subjected  to  slightly  different  treatment.  In  the 
former,  a  deduction  of  .liSjOOO  and  eight  per  cent,  net 
income  on  invested  capital  was  allowed  to  the  taxpaj^er 
before  division  with  the  Government.  In  the  latter,  a 
deduction  of  $3,000  was  allowed,  and  in  addition  an 
amount  equal  to  10  per  cent,  net  income  on  invested 
capital,  or,  average  pre-war  net  income  on  invested 
capital  and  10  per  cent,  on  any  additional  invested 
capital  used  in  the  taxable  year.  Fine  distinctions  were 
drawn  in  the  matter  of  differentiating  between  pre-war 
net  income  and  taxable  year  net  income  for  corporations 
coming  into  being  since  pre-war  days,  but,  broadly 
speaking,  the  legislative  intent  was  to  declare  normal 
profits  due  to  the  taxpayer  to  be  $3,000  and  eight  per 
cent,  income  on  his  investment,  and  in  war  industry, 
$3,000  and  10  per  cent,  on  his  investment.  The  excess 
over  these  deductions  was  taxed  by  the  Government  in 
the  following  percentages: 


(1)  30  per  cent,  between  exemption  and  20  per  cent,  on 
invested  capital; 

(2)  65  per  cent,  over  20  per  cent,  on  invested  capital; 

290 


TAXATION  IN  THE  UNITED  STATES 

(3)  80  per  cent,  on  the  excess  net  income  above  the  ex- 
emption, less  the  sums  paid  as  taxes  iindei-  (1)  and  (2). 

This  rate  applied  for  the  calendar  year  1918,  but  for 
1919  and  thereafter  the  above  30  per  cent,  rate  is 
reduced  to  20  per  cent.,  and  the  65  per  cent,  rate  is 
reduced  to  40  per  cent.  Profits  on  United  States  war 
contracts  were  subject  to  special  taxation  computations. 
The  severity  of  these  rates,  however,  was  modified  by 
a  provision  fixing  the  maximum  ratio  of  the  tax  to  net 
income.  It  was  provided  that  the  tax  imposed  should 
in  no  case  be  more  than  30  per  cent,  of  the  amount  of 
the  net  income  between  $3,000  and  $20,000  plus  80  per 
cent,  of  the  net  income  in  excess  of  $20,000. 

The  estate  or  inheritance  tax  was  remodeled  by 
increasing  the  number  of  classes,  a  change  which  had 
the  effect  of  reducing  the  rates  on  net  estates  between 
$750,000  and  $2,000,000.  In  other  respects  the  Act 
was  substantially  the  same  as  that  of  October  3,  1917.-" 

The  next  seven  titles  of  the  Act  dealt  with  taxes  on 
transportation  and  other  facilities  and  on  insurance, 
beverages,  cigars,  tobacco,  and  manufacturers  thereof, 
admissions  and  dues,  excise  taxes,  special  taxes,  and 
stamp  taxes.  The  tax  on  transportation,  on  freight  and 
express,  and  on  tickets  was  unchanged  but  the  rate  on 
Pullman  tickets  was  reduced  from  10  to  eight  per  cent. 
The  rate  of  the  tax  on  telephone,  telegraph,  and  cable 
messages  between  15  and  50  cents  remained  at  five  cents, 
but  a  new  tax  of  10  cents  was  imposed  when  the  charge 
was  OA'er  50  cents,  A  new  tax  of  10  per  cent,  was  also 
imposed  for  leased  wires.  It  was  estimated  that  with 
these  changes  the  revenue  from  the  telephone  and  tele- 
graph   taxes    would    be    raised    from    $6,000,000    to 

^  The  rates  and  groups  are  shown  in  Appendix. 

291 


WAR  COSTS  AND  THEIR  FINANCING 

$16,000,000.  No  changes  were  made  in  the  insurance 
taxes  as  provided  in  the  law  of  October  3,  1917. 

The  tax  on  alcoholic  liquors  possesses  only  an  academic 
interest  in  view  of  the  ratification  of  the  prohibition 
amendment  to  the  Federal  Constitution.  Originally 
expected  to  provide  over  a  billion  dollars  of  revenue, 
the  estimate  was  later  reduced  to  half  this  sum.  As 
finally  enacted,  the  rate  on  distilled  spirits  was  doubled 
if  withdrawn  for  beverage  purposes,  being  raised  from 
$3.20  to  $6.40  a  gallon,  but  on  spirits  for  non-beverage 
purposes  the  rate  remains  at  $3.20.  On  still  wines  with 
less  than  24  per  cent,  of  alcohol  the  rates  were  doubled, 
as  they  were  on  sparkling  wines,  artificially  carbonated 
waters,  cordials,  etc.;  on  still  wines  with  over  24  per 
cent,  of  alcohol  the  rate  remained  the  same.  Other 
changes  were  made  in  the  taxes  on  soft  drinks  and 
mineral  waters.  But  the  most  important  provision,  not 
so  much  from  the  standpoint  of  revenue  as  because  of 
the  annoyance  it  has  caused,  was  the  tax  of  one  cent 
on  each  10-cent  purchase  at  a  soda  fountain.  The  rates 
of  the  tax  on  cigars  were  raised  about  50  per  cent.,  and 
at  the  same  time  a  slight  reclassification  of  the  retail 
price  was  made.  A  similar  increase  was  imposed  upon 
cigarettes. 

The  rates  of  the  tax  on  admissions  were  practically 
the  same  as  in  the  previous  Act,  though  some  additional 
provisions  were  inserted,  which  exacted  heavier  rates 
from  scalpers,  from  admissions  to  roof  gardens  and 
cabarets,  and  on  purchases  of  food  where  no  admission 
was  charged.  The  rate  of  the  tax  on  club  dues  remained 
unchanged  at  10  per  cent.,  but  it  was  now  imposed  on 
dues  over  $10  a  year. 

The  excise  taxes  provided  for  in  Title  IX  were  dividpd 
by  the  Act  into  three  parts ;  the  first  covered  articles  \]\e 

292 


\ 

TAXATION  IN  THE  UNITED  STATES 

tax  on  which  was  to  be  paid  by  the  manufacturer  or 
importer;  the  second,  those  on  which  the  tax  was  to  be 
paid  by  the  purchaser;  and  the  third,  those  on  which 
the  tax  was  to  be  paid  by  the  dealer.  In  the  first  group 
were  included  most  of  the  articles  that  had  been  taxed 
under,  the  Act  of  1917,  such  as  automobiles,  musical 
instruments,  sporting  goods,  and  cameras;  but  on  all 
of  these,  except  automobile  trucks,  the  rates  were  con- 
siderably raised.  A  number  of  other  articles  was  added 
to  this  group,  such  as  firearms,  hunting  knives,  electric 
fans,  thermos  bottles,  slot  machines,  liveries,  hunting 
and  riding  habits,  fur  garments,  and  toilet  soaps. 

The  taxes  on  retail  sales,  which  constituted  the  second 
group,  followed  the  line  of  the  luxury  taxes  introduced 
by  France  and  England.-^  There  was  included  under 
this  head  a  miscellaneous  assortment  of  excise  taxes, 
some  of  which  had  been  imposed  under  the  previous 
Act,  but  which  was  now  greatly  enlarged  by  the  addi- 
tion of  a  number  of  nonessentials  and  luxuries.  There 
was  evidently  a  double  purpose  back  of  this  provision 
of  the  Act,  one  to  obtain  revenue  and  the  other  to  check 
extravagance  by  taking  toll  of  those  who  spent  money 
on  superfluities  or  on  unnecessarily  costly  articles. 

A  tax  of  10  per  cent,  was  imposed  on  prices  in  excess 
of  specified  minima,  in  the  case  of  carpets,  rugs,  picture 
frames,  trunks,  valises,  ladies'  purses,  lamps,  umbrellas, 
fans,  smoking  jackets,  waistcoats,  hats,  footwear,  neck- 
wear, silk  stockings,  men's  shirts,  nightgowns,  and 
kimonos.  Another  small  group  of  articles,  evidently 
regarded  as  pure  luxuries,  were  taxed  a  certain  per- 
centage irrespective  of  their  price,  such  as  jewelry,  pre- 
cious stones,   ivory   ornamented   articles,   watches,    etc. 

=*See  E.  L.  Bogart.  "Luxury  Taxes,"  in  The  Bulletin  of  the 
National  Tax  Association,  June.   IDIO,  p.  237. 

293 


WAR  COSTS  AND  TflEIR  FINANCING 

Finally,  the  third  group  of  taxes,  to  be  paid  by  dealers, 
included  motion  picture  films,  toilet  articles,  and 
medicinal  compounds. 

The  luxury  tax,  like  the  excess  profits  tax,  has  been 
one  of  the  new  fiscal  results  of  the  war,  but  it  has  not 
commended  itself  in  the  same  degree  as  the  latter.  Great 
Britain  has  already  permitted  her  luxury  tax  to  lapse 
after  about  six  months  of  operation ;  France  seems  likely 
to  retain  hers,  as  it  suits  the  national  genius  better  than 
does  the  same  tax  in  Anglo-Saxon  countries.  In  the 
United  States  President  Wilson  had  already  urged  the 
repeal  of  the  tax  on  retail  sales  in  his  message  to 
Congress  of  May  20,  1919.  It  is  unlikely  that  this  tax 
will  be  retained  very  long  in  our  revenue  system. 

Under  the  title  "  Special  Taxes  "  provision  was  made 
for  an  excise  tax  on  corporations,  brokers,  proprietors  of 
theatres,  circuses,  bowling  alleys,  auto  carriers,  etc.  A 
penal  tax  of  $1,000  was  also  imposed  on  brewers,  dis- 
tillers, and  liquor  dealers  carrying  on  business  in  pro- 
hibition territory.  Manufacturers  of  tobacco,  cigars,  and 
cigarettes  were  also  taxed  under  this  section,  at  rates 
distinctly  higher  than  those  levied  under  the  existing 
legislation.  Finally,  the  old  tax  of  $1  a  year  on  manu- 
facturers or  distributors  of  opium  was  superseded  by  a 
comprehensive  tax  on  importers,  manufacturers  and 
sellers  of  opium  and  other  habit-forming  drugs.  An 
excise  tax  of  $120  per  year  was  imposed  on  wholesalers ; 
$24  a  year  on  importers,  manufacturers,  or  producers; 
$6  on  retailers;  and  $3  a  year  on  doctors,  dentists,  and 
others  who  used  the  drug  in  their  profession.  In  addi- 
tion to  these  excises,  a  further  tax  of  one  cent  per  ounce 
was  levied  upon  the  drugs  themselves.  If  any  criticism 
is  to  be  made  of  this  tax,  it  is  that  the  rates  were  not 
sufficiently  heavy, 

294 


TAXATION  IN  THE  UNITED  STATES 

Stamp  taxes  were  practically  the  same  as  provided  for 
under  the  Act  of  1917,  though  a  few  increases  in  exist- 
ing rates  were  made. 

The  revenues  of  the  Government  by  the  main  groups 
of  sources,  exclusive  of  postal  receipts,  have  been  as 
follows  for  the  period  of  the  war  in  Europe : 


Revenues  of  the  United  States,  Fiscal  Years  1914-1919 
[In  millions) 


Source 

1914 

1915 

1916 

1917 

1918 

1919 

Customs 

Income  and 
profits . 

Miscellaneous  in- 
ternal revenue 

Sales  of  public 
lands 

Miscellaneous. .  . 

$292.3 

71.4 

308.7 

2.6 
59.7 

$209.3 

80.2 

335.4 

2.2 
70,8 

$213.2 

124.9 

384.7 

1.8 
54.8 

$225.7 

359.7 

449.7 

1.9 
81.2 

$182.8 

2,838.9 

857.0 

1.9 
293.2 

$183.4 

2,600.7 

1,239.5 

1.4 
622.5 

Total 

$734.7 

$697.9 

$779.4 

$1,118.2 

$4,173.8 

.$4,647.5 

In  addition  to  the  revenue  provisions  already  enumer- 
ated, the  Act  of  1918  included  a  provision  wliich 
was  designed  to  prevent  the  employment  of  child 
labor.  Under  the  name  of  a  tax  a  wholesome 
penalty  in  the  form  of  a  forfeiture  of  10  per  cent, 
of  the  net  profits  was  imposed  on  any  mine  or  quarry 
in  which  children  under  16  are  employed;  and  on 
any  mill,  cannery,  workshop,  factory,  or  manufactur- 
ing establishment  in  which  children  under  14  are 
employed,  or  children  between  14  and  16  are  employed 
more  than  eight  hours  a  day,  or  between  7  p.  m.  and 
6  a.  m.  Heavy  penalties  were  provided  for  the  evasion 
of  this  provision.    In  view  of  the  fate  that  overtook  the 

295 


WAR  COSTS  AND  THEIR  FINANCING 

previous  Federal  Child  Labor  Act,  it  is  doubtful  whether 
this  provision  will  be  able  to  stand  the  constitutional 
tests.  Already  a  test  case  has  been  brought  which  is 
designed  to  determine  the  validity  of  the  Act.  Appeals 
have  been  filed  from  Federal  court  decrees  in  North 
Carolina  which  held  that  section  of  the  statute  invalid.^- 
=^  Washington  Fost,  May  26,  1919. 


CHAPTEE  X 

HOW  SHOULD  A  W.\R  BE  FINANCED?       THE  LESSON  OF  THE 
CIVIL   WAR 

The  problem  of  financing  tlie  Civil  War  —  Chase's  loan  policy  — 
Inadequacy  of  taxation  —  Issue  of  legal  tender  notes  —  Sj's- 
tem  of  short  term  loans  —  Bond  acts  —  Conclusions  —  Finan- 
cial management  of  the  World  War  —  Inability  to  meet 
current  charges — Loans  vs.  taxes  —  ArgTiments  for  a  loan 
policy  —  Disadvantages  of  heavy  taxation — Arguments  for 
a  tax  policy  —  Evils  of  excessive  loans. 

It  has  been  said  that  each  generation  learns  only  from 
its  own  experience  and  frequently  repeats  the  mistakes 
of  past  ages.  The  financial  management  of  the  World 
War  inclines  one  to  believe  this  statement,  for  it  has 
been  necessary  to  thresh  over  again  many  old  problems, 
and  in  not  a  few  particulars  there  has  been  a  repetition 
of  earlier  mistakes.  A  common  experience  in  all  great 
wars  has  been  the  belief  that  the  particular  struggle 
w^ould  be  short-lived.  It  was  expected  that  the  Civil 
War  would  be  over  in  a  few  months,^  and  in  the  late  war 
there  w^ere  expressions  of  opinion  from  various  quarters, 
otherwise  well  informed,  to  the  same  effect.^  To  this 
belief  and  the  consequent  inadequate  realization  of 
present  needs  must  be  ascribed  many  of  the  failures  of 
war  finance.  Because  of  this  view  Secretary  Chase 
developed  his  insufficient  anddisastrousloanpolicy  in  the 
Civil  War,  and  in  the  late  war  the  hope  of  the  speedy 
collapse  of  the  Central  Powers,  so  assiduously  promul- 
gated by  a  willing  press,  undoubtedly  affected  the  fisca^ 

'"Report   on  the   Finances,"  1861,  p.  21. 

-See  ch.  ii,  supra;  cf.  also  A.  D.  Noyes,  Financial  Chapters  of 
the  War,  p.  16ff. 

297 


WAR  COSTS  AND  THEIR  FINANCING 

policies  of  the  leading  Entente  belligerents.  As  the 
financing  of  the  World  War  has  been  overwhelmingly 
by  means  of  loans,  the  financial  conduct  of  the  Civil 
War,  upon  which  history  has  already  rendered  its 
verdict,  has  a  peculiar  interest  and  offers  some  valuable 
lessons. 

The  two  main  problems  that  were  presented  in  the 
financing  of  the  Civil  War  were,  first,  to  determine  the 
proper  proportion  between  loans  and  taxes,  and,  second, 
to  decide  how  best  to  raise  the  necessary  funds  by  the 
method  chosen.  It  is  the  purpose  of  the  following  pages 
to  suggest  that  on  both  of  these  points  serious  mistakes 
were  made."" 

The  financial  management  of  the  Civil  War  was 
inspired  and  directed  primarily  by  Salmon  P.  Chase, 
who  was  Secretary  of  the  Treasury  from  March,  1861, 
to  July,  1864,  and  to  him  must  be  given  the  praise  or 
blame  for  its  conduct.  The  financial  situation  of  the 
Treasury  when  Chase  assumed  office  was  disheartening.* 
Under  Buchanan's  administration  the  debt  had  been 
increased  by  $18,000,000,  bringing  it  up  to  $74,985,000 ; 
the  revenues  had  fallen  off,  and  the  public  credit  was 
undermined.  The  last  issue  of  Treasury  notes  for 
$5,000,000  had  been  issued  at  12  per  cent,  interest.^ 
It  was  estimated  on  January  18,  1861,  by  John  A.  Dix, 
then  Secretary  of  the  Treasury,  that  it  would  be  neces- 

'  This  account  is  taken  from  a  paper  read  at  a  conference  of 
the  Wes'ern  Economic  Society  at  Cliicago  on  June  21,  1917,  and 
printed  under  the  title,  "Lessons  from  Our  Past:  The  Financial 
Manafiement  of  the  Civil  War."  in  Finnnrial  Mohilization  for 
War,  pp.  68-84;  it  is  now  reprinted  with  the  permission  of  the 
editor. 

* "  A  more  difficult  position  than  that  of  Secretary  Chase  at 
this  moment  few  men  have  ever  been  placed  in."  (Appleton's 
American  Annual  Cyclopaedia,  1861,  "Finances  of  the  U.  S.," 
p.  305.) 

"  Bolles,  Financial  History  of  the  United  States,  iii,  p.  5. 

298 


HOW  SHOULD  A  WAR  BE  FINANCED 

sary  to  raise  $44,077,525  to  meet  outstanding  and 
accruing  dues  before  the  close  of  the  present  fiscal  year.^ 
The  Treasury  was  all  but  empty,  the  available  funds 
amounting  only  to  $1,716,000,  and  until  Congress  met 
for  new  legislation,  Chase  was  forced  to  rely  upon 
previous  loan  acts,  under  which  authority  existed  for 
negotiating  loans  and  for  issuing  Treasury  notes  to  a 
total  amount  of  about  $41,000,000.  On  :\Iarch  22,  Chase 
advertised  a  loan  of  $8,000,000  at  six  per  cent,  and 
received  bids  aggregating  $27,182,000  and  ranging  from 
85  per  cent,  to  100  per  cent.  Right  here  Chase  made  his 
initial  mistake  in  the  financial  conduct  of  the  Civil  War, 
for  he  refused  all  offers  under  94.  By  this  act  he  was 
able  to  sell»only  $3,099,000  and  was  accordingly  forced 
to  issue  the  balance  of  $4,901,000  in  Treasury  notes. 
These  Treasury  notes  were  not  Government  paper 
money;  they  were  made  payable  to  the  order  of  the 
person  who  received  them,  were  transferable  by  indorse- 
ment, bore  interest  at  six  per  cent.,  were  convertible  into 
bonds,  and  receivable  in  payment  of  all  public  dues. 
They  were  thus  short-time  notes,  like  I.  0.  U.'s  of  an 
impecunious  debtor,  and  should  have  been  reserved  for 
pressing  emergencies.  It  was  certainly  a  bad  principle 
to  issue  them  at  the  beginning  of  a  war,  and  their  use 
undoubtedly  helped  to  undennine  public  credit,  for  they 
fell  due  while  the  Government  was  borrowing  other 
sums."     On  April  12,  Fort  Sumter  was  fired  upon  and 

'  Sherman,  Recollections,  i,  p.  252. 

'  On  this  point,  as  on  so  many  connected  with  this  subject, 
there  was  difference  of  opinion  among  contemporary  writers,  the 
press  being  about  equally  divided.  The  New  York  Times  urged 
the  issuance  of  the  entire  sum  in  Treasury  bills,  as  during  the 
Mexican  War  (May  13,  1861).  The  action  of  Chase  is  defended 
among  later  writers  by  Nicholai  and  Hay  {Life  of  Lincoln),  by 
Shuckers  {Life  of  Chase,  p.  184),  McCulloch  {Men  and  Measures 
of  Half  a  Century,  p.  411),  Bolles,  {op.  cit.,  iii,  p.  9),  and 
others. 

299 


WAR  COSTS  AND  THEIR  FINANCING 

war  had  now  begun,  an  event  which  affected  public 
credit  unfavorably  at  the  time.  A  second  call  on 
May  11  for  bids  for  $8,994,000  worth  of  bonds  brought 
in  offers  for  $7,310,000  at  prices  ranging  from  85  to  93, 
and  this  amount  of  bonds  was  sold,  the  balance  of 
$1,684,000  being  issued  in  Treasury  notes.  A  third 
invitation  for  proposals  for  $12,584,550  resulted  in  only 
three  bids,  aggregating  $12,000,  and  these  were  "  made 
under  misapprehension."^  Accordingly,  the  whole 
amount  was  issued  in  Treasury  notes.  In  addition  to 
these  resources,  about  $5,500,000  had  been  received  from 
customs  duties  and  small  amounts  from  several  other 
sources  of  revenue  in  the  quarter  ending  June  30,  but 
the  fiscal  year  1861  closed  'with  a  deficit  of  about 
$20,000,000. 

The  financial  outlook  was  certainly  very  discourag- 
ing. The  tone  of  the  European,  and  especially  of  the 
English  press,  which  wdth  a  single  exception  was  in 
sympathy  with  the  rebellious  states,  showed  that  no 
money  could  be  borrowed  from  Europe.^  Nor  did  this 
foreign  hostility  to  the  North  cease  until  the  war  was 
ended.  When  bonds  could  be  had  at  bargain  prices, 
some  were  sold  to  German  capitalists,  but  on  the  whole 
it  was  clear  that  the  people  of  the  loyal  states  would 
have  to  assume  the  burden  of  financing  the  war  them- 
selves. 

Congress  convened  in  special  session  on  July  4,  1861, 
and  Chase  now  submitted  his  plan  for  the  conduct  of 
the  war.  This  was  a  loan  policy.  Taxes  were  to  be 
levied  sufficient  to  pay  interest  on  new  debt  and  to 
establish  a  sinking  fund,  but  all  additional  expenditures 
were  to  be  met  by  loans  or  by  the  issue  of  Treasury 


^  Bolles,  op.  cit.,  iii,  p.  10. 
'  McCulloch,  op.  cit.,  p.  183. 


300 


HOW  SHOULD  A  WAR  BE  FINANCED 

notes.     This  policy  was  clearly  outlined  in  his  first  war 
report :" 

To  provide  the  large  sums  required  for  ordinary  expendi- 
tures, and  by  the  existing  emergency,  it  is  quite  apparent  that 
duties  on  imports,  the  cliief  resource  for  ordinary  disburse- 
ments, will  not  be  adequate.  The  deficiencies  of  revenue, 
whether  from  imports  or  other  sources,  must  necessarily  be 
supplied  from  loans  and  the  problem  to  be  solved  is  that 
of  so  proportioning  the  former  to  the  latter,  and  so  adjusting 
the  details  of  both,  that  the  whole  amount  needed  may  be 
obtained  with  certainty,  with  due  economj^,  with  the  least 
possible  inconvenience,  and  with  the  greatest  possible  inci- 
dental benefit  to  the  people. 

The  Secretary  .  .  .  is  of  the  opinion  that  not  less  than 
eighty  millions  of  dollars  should  be  provided  by  taxation,  and 
that  two  hundred  and  forty  millions  of  dollars  should  be 
sought  through  loans. 

It  will  hardly  be  disputed  that  in  every  sound  system  of 
finance,  adequate  provision  by  taxation  for  the  promi:)t  dis- 
charge of  all  ordinary  demands,  for  the  punctual  payment 
of  the  interest  on  loans,  and  for  the  creation  of  a  gi'adually 
increasing  fund  for  the  redemption  of  the  principal,  is 
indispensable.  Public  credit  can  only  be  supported  by 
public  faith,  and  public  faith  can  only  be  maintained  by  an 
economical,  energetic  and  prudent  administration  of  public 
affairs,  by  the  prompt  and  punctual  fulfillment  of  every 
public  obligation. 

The  slight  role  to  be  played  by  taxation  in  the  plan 
is  not  sufficiently  indicated  by  this  statement.  Out  of 
the  $318,519,582  estimated  to  be  needed,  one-quarter  or 
$80,000,000,  was  to  be  raised  by  taxes.  Of  this,  about 
$66,000,000  would  be  needed  for  the  ordinary  expendi- 

1°  Report  of  the  Secretary  of  the  Treasury,  July  5.  1S61, 
Senate  Executive  Document  No.  2,  37th  Congress,  1st  Session, 
p.  2.  It  is  interesting  to  note  that  according  to  this  plan  one- 
fourth  of  the  expenditures  was  to  be  met  by  taxation. 

301 


WAR  COSTS  AND  THEIR  FINANCING 

tures  of  the  peace  establishment;^^  $9,000,000  for  the 
payment  of  interest ;  and  $5,000,000  for  a  sinking  fund. 
Chase  estimated  that  the  existing  customs  duties  would 
yield  about  $30,000,000  and  that  additional  duties  on 
tea  and  coffee,  then  admitted  free,  and  on  sugar,  which 
was  lightly  taxed,  and  a  slight  increase  on  the  general 
list  of  dutiable  articles,  would  bring  the  total  from  this 
source  up  to  $57,000,000.^"  Sales  of  public  land  and 
miscellaneous  revenue  might  be  counted  on  to  increase 
this  to  $60,000,000.  The  remaining  $20,000,000,  he  sug- 
gested, might  be  raised  by  ' '  direct  taxes,  or  from  inter- 
nal duties  or  excises,  or  from  both,"  but  he  abstained 
from  making  a  definite  recommendation.^^  He  also 
urged  the  confiscation  of  the  property  of  rebels  and 
retrenchment  in  expenditures  by  a  10  per  cent,  reduction 
upon  salaries  and  wages  paid  by  the  Federal  Govern- 
ment, the  abolition  of  the  franking  privilege,  and  the 
reduction  of  postal  expenses.^* 

Slight  as  was  the  resort  to  taxation  recommended  by 
Chase,  Congress  fell  short  even  of  his  modest  demands. 
The  duties  imposed  upon  coffee,  tea,  and  sugar  were 
lower  than  those  urged  by  Chase^^  and  the  other  changes 
in  the  tariff  were  unimportant.  No  steps  were  taken 
toward  the  establishment  of  an  internal-revenue  or  excise 
system,  which  it  will  be  remembered  had  not  existed  in 
the  country  since  1817,  but  a  direct  tax  of  $20,000,000 
and  an  income  tax  were  imposed. ^^     As  the  direct  tax 

"  That  this  estimate  was  rather  low  is  shown  by  the  fact  that 
the  average  annual  expenditures  for  the  five  years  ending  June 
30,  1861,  were  $68,092,000,  while  for  the  10  years  past  they 
were  $61,488,700. 

^-Report  of  the  Secretary  of  the  Treasury,  July  5,  1861,  Senate 
Executive  Document  No.  2,  37th  Congress,  1st  Session,  p.  8 

"/&!(?.,    p.   9. 

"7Mf7.,  p.  10. 

""Eeport  on  the  Finances,"  December  9,  1861,  p.  10. 
"  Act  of  August  5,  1861,  37th  Congress,  1st  Session ;  c.xlv. 

302 


I 


now  SHOULD  A  WAR  BE  FINANCED 

was  apportioned  among  all  the  states,  it  was  manifest 
that  only  that  part  of  it  falling  upon  the  loyal  states, 
to  the  amount  of  $14,846,018,^^  could  be  counted  upon; 
it  was,  moreover,  not  due  for  eight  months.  The  income 
tax  of  three  per  cent,  on  incomes  over  $800  was  not  to 
become  effective  for  10  months.  It  was  quite  evident, 
therefore,  from  this  legislation  that  it  was  the  intention 
both  of  Chase  and  of  Congress  to  finance  the  war  mainly 
by  loans.  It  has  been  urged  as  an  excuse  for  this  policy 
that  there  was  a  general  belief  that  the  war  would  be 
over  in  a  few  months,^*  and  there  was  also  an  unwilling- 
ness to  create  friction  and  opposition.^^  The  duty  of 
the  Secretary  of  the  Treasury  in  such  a  crisis,  however, 
was  to  take  measures  that  would  place  the  Government 
on  a  sound  financial  footing  if  unhappily  his  optimism 
should  prove  to  be  unfounded. 

In  the  part  of  his  July  report  relating  to  the  raising 
of  $240,000,000  by  loans.  Chase  recommended  that  he  be 
authorized  to  sell  four  kinds  of  securities:  $100,000,000 
in  three-year  Treasury  notes  bearing  interest  at  7.30 
per  cent.,  popularly  known  as  "  seven-thirties  ";  $100,- 
000,000  in  20-year  bonds  bearing  interest  at  seven  per 
cent. ;  and  $50,000,000  in  Treasury  notes  of  small 
denomination,  either  bearing  interest  at  3.65  per  cent, 
or  payable  on  demand  in  coin.  These  latter  were  known 
as  ' '  demand  notes. ' '  In  making  these  recommendations 
he  added  the  warning :-''  "  The  greatest  care  will,  how- 
ever, be  requisite  to  prevent  a  degradation  of  such  issues 
into  an  irredeemable  paper  currency,  than  which   no 

""Report  on  the  Finances,"  1861,  p.  14. 

"  "  It  is  earnestly  hoped,  and,  in  the  judgment  of  the  Secretary, 
not  without  sufficient  grounds,  that  the  present  war  may  be 
brought  to  an  auspicious  termination  before  midsummer."  ("Re- 
port on  the  Finances.''  1S61,  p.  21.) 

'^  Blaine,  Twenty  Years  of  Congress,  i,  p.  402. 

=""  Report,"  December  9,  1861,  p.   14. 

303 


WAR  COSTS  AND  THEIR  FINANCING 

more  certainly  fatal  expedient  for  impoverishing  the 
masses  and  discrediting  the  Government  can  well  be 
devised."  In  spite  of  this  condemnation  of  an  irre- 
deemable paper  currency,  he  was  already  laying  the 
foundation  for  it  by  his  loan  policy. 

These  recommendations  were  promptly  enacted  into 
law  by  Congress  by  the  Act  of  July  17,"^  which  added  a 
fifth  kind  of  security  to  the  four  suggested  by  Chase, 
namely,  one-year  six  per  cent.  Treasury  notes  in  amount 
not  to  exceed  $20,000,000.  No  bonds  were  to  be  sold 
under  par.  On  August  5,  a  supplemental  bill  was 
passed,  which  provided  that  part  of  the  issue  of  20-year 
bonds  might  be  issued  at  six  per  cent,  in  exchange  for 
seven-thirty  Treasury  notes;  these  bonds  could  be  sold 
below  par.^-  The  sixth  section  of  this  Act  suspended 
the  Independent  Treasury  Act  of  184G  to  the  extent  of 
permitting  the  Secretary  of  the  Treasury  to  make  de^ 
posits  with  banks. 

After  the  battle  of  Bull  Run  on  July  21,  1861,  the 
credit  of  the  Government  fell  and  a  popular  loan  was 
out  of  the  question.  Chase  hastened  to  New  York  City, 
where  he  had  a  conference  with  the  leading  bankers  of 
New  York,  Boston,  and  Philadelphia,  and  arranged  for 
a  loan  from  them  of  $150,000,000.  The  banks  were  to 
receive  seven-thirty  Treasury  notes  at  par  and  were  to 
advance  the  money  to  the  Government  in  three  install- 
ments of  $50,000,000  each.  On  the  other  hand,  the 
Secretary  was  to  negotiate  no  other  bonds  or  Treasury 
notes  except  the  demand  notes,  which  were  being  use  1 
to  pay  salaries.2^  In  his  negotiation  with  the  banks, 
Chase  displayed  a  lack  of  understanding  both  of  finance 

«  Act  of  July  17,  1861,  37th  Congress,  1st  Session,  c.  v. 

"  N.   A.   Bayley,   National   Loans   of  the   United  States,  p.   78. 

**Bolles,  op.  cit.,  iii,  p.  21. 

304 


HOW  SHOULD  A  WAR  BE  FINANCED 

and  of  liumau  nature.    His  own  account  of  the  interview 
is  as  follows  :-* 

I  was  obliged  to  be  very  firm,  and  to  say :  "  Gentlemen, 
I  am  sure  you  wish  to  do  all  you  can.  I  hope  you  will  find 
that  you  can  take  the  loans  required  on  terms  which  can 
be  admitted.  If  not,  I  must  go  back  to  Washington  and 
issue  notes  for  circulation;  for,  gentlemen,  the  war  must 
go  on  until  this  rebellion  is  put  down,  if  we  have  to  put 
out  paper  until  it  takes  $1,000  to  buy  a  breakfast." 

Threats  and  coercion  were  certainly  not  the  methods 
best  adapted  to  secure  the  cooperation  of  the  banking- 
institutions.  Chase  did  not  seem  to  realize  that  in  bor- 
rowing money  the  Government  is  essentially  upon  the 
same  footing  as  individuals,  except  as  it  may  appeal  to 
patriotism.     It  certainly  cannot  safely  resort  to  force. 

The  banks  accepted  the  decision  of  the  Secretary  and 
paid  over  their  specie  to  the  Government  at  the  rate 
of  about  $5,000,000  a  week.  So  large,  however,  were 
the  disbursements  of  the  Treasury  and  so  rapid  the 
movements  of  trade  that  the  coin  thus  paid  out  was 
returned  again  to  the  banks  for  deposit  in  about  a  week. 
All  might  yet  have  gone  well  if  Chase  had  not  begun 
to  issue  demand  notes  again.  This  he  had  done  in 
August,  but  because  of  the  protest  of  the  banks,  had 
refrained  while  the  proceeds  of  the  loans  were  coming 
in ;  but  now,  finding  himself  in  straits  again,  he  i*esorted 
to  their  use  very  freely  in  November.  As  these  were 
redeemable  in  coin,  the  banks  were  expected  by  their 
customers  to  receive  them  for  deposit  and  then  permit 
them  to  be  drawn  against  in  coin.  In  this  way  the  coin 
reserves  of  the  banks  would  be  drained  oflP  by  notes  over 
the  issue  of  which  they  could  exercise  no  control. 

=*  A.  B.  Hart,  Chase,  p.  222. 

305 


WAR  COSTS  AND  TITEIR  FINANCING 

The  banks  had  met  the  first  two  payments  to  the  Gov- 
ernment of  August  and  October  without  difficulty.  In 
spite  of  the  fact  that  they  had  loaned  $100,000,000,  their 
coin  reserve  had  fallen  only  $5,000,000,  or  from 
$63,200,000  on  August  17  to  $58,100,000  on  December  7. 
On  November  16  the  third  installment  of  the  loan  was 
called  for,  but  the  specie  advanced  by  the  banks  did 
not  return  freely  to  them  as  it  had  in  the  first  two 
cases,  as  the  channels  of  trade  were  now  choked  by  the 
demand  notes.  During  the  three  weeks  following  Decem- 
ber 7  the  New  York  banks  lost  $13,000,000  in  specie. 
Depositors  became  frightened  and  began  to  withdraw 
funds  for  hoarding.  In  the  circumstances  there  was  no 
recourse  but  the  suspension  of  specie  payments,  which 
was  declared  l)y  the  banks  of  the  country  on  December 
30  and  speedily  followed  by  the  Government.  To  this 
result  the  policy  of  the  Secretary  of  the  Treasury  con- 
tributed largely,  if,  indeed,  was  not  entirely  responsible 
therefor. 

Chase's  report  of  December,  1861,  was  a  disappoint- 
ment and  did  nothing  to  avert  the  crisis;  in  fact  it 
injured  the  credit  of  the  Government.-^  It  was  generally 
felt  that  the  plan  of  borrowing  from  the  banks  and  of 
issuing  demand  notes  should  be  only  a  temporary  make- 
shift until  a  permanent  and  vigorous  policy  of  taxation 
could  be  matured.  But  Chase  presented  no  such 
program  in  his  report.  He  was  forced  to  revise  his 
estimates  of  the  previous  July  as  to  tax  revenues ;  instead 
of  the  $80,000,000  anticipated,  he  now  estimated  only 
$55,000,000,2«  a  loss  of  $25,000,000,  practically  all  of 
which  was  due  to  the  falling  off  of  customs  duties.     He 

^''W.  C.  Mitchell,  in  Journal  of  Political  Economy,  June,   1899. 
°' Report  of  the  Secretary  of  the  Treasury,  December  9,  1861, 
p.  11. 

306 


I 


HOW  SHOULD  A  WAR  BE  FINANCED 

realized  that  duties  on  imports  could  not  be  relied  upon 
as  a  source  of  revenue,  and  recommended  that  the  rates 
on  sugar,  tea,  and  coffee  be  raised,  but  "  that  no  other 
alterations  of  the  tariff  be  made  during  the  present 
session  of  Congress."-'^  He  also  urged  that  the  direct 
tax  be  increased  so  as  to  raise  $20,000,000  from  the 
loyal  states  alone,  and  that  the  income  tax  be  modified 
so  as  to  yield  $10,000,000.  In  addition  to  these  he  sug- 
gested for  the  first  time  the  estalilishment  of  a  system 
of  internal  duties  to  consist  of  taxes  on  stills  and  dis- 
tilled liquors,  on  tobacco,  on  bank  notes,  on  carriages,  on 
legacies,  on  paper  evidences  of  debt  and  instruments  for 
conveyance  of  property,  and  other  like  subjects  of  taxa- 
tion ;  from  these  sources  he  hoped  to  secure  $20,000,000. 
Altogether  he  planned  to  raise  by  taxation  for  the  fiscal 
year  1862  some  $90,000,000,  and  for  the  fiscal  year  1863 
some  $95,000,000.  The  Secretary  regretted  that  he  must 
ask  for  such  large  sums  but  felt  that  they  were  barely 
sufficient  "  to  meet  even  economized  disbursements,  and 
pay  the  interest  on  the  public  debt,  and  provide  a  sink- 
ing fund  for  the  gradual  reduction  of  its  principal."^* 
There  is  here  no  evidence  of  the  abandonment  of  the 
loan  policy  or  of  a  vigorous  resort  to  taxation.  In  fact, 
Chase  takes  pains  to  repeat  "  the  principles  by  which, 
as  he  conceives,  the  proportions  of  taxation  and  loans 
should  be  determined,"-^  Taxes  should  meet  the  ordi- 
nary peace  expenditures,  interest  on  the  debt,  and  a 
sinking  fund,  but  all  extraordinary  expenses  should  be 
defrayed  out  of  loans.  "  It  will  be  seen  at  a  glance," 
continues  the  report,  "  that  the  amount  to  be  derived 
from  taxation  forms  but  a  small  portion  of  the  sums 

"  Ibid.,  p.  14. 
"^Jbid.,  p.  15. 
^Ibid.,  p.  13. 

307 


WAR  COSTS  AND  THEIR  FINANCING 

required  for  the  expenses  of  the  war.  For  the  rest, 
reliance  must  be  placed  on  loans.  "^° 

One  reason  for  Chase's  unwillingness  to  urge  heavy 
taxation  was  his  belief  that  the  people  would  not  stand 
it.  "  He  has  read  history  to  little  purpose,"  he  wrote, 
"  who  does  not  know  that  heavy  taxes  will  excite  dis- 
content." In  this  respect,  however,  he  failed  to  realize 
the  loyalty  and  willingness  of  the  people  to  support  a 
more  vigorous  policy.  This  is  illustrated  by  the  tone  of 
various  memorials  presented  to  Congress  by  commercial 
and  scientific  associations,  begging  that  more  adequate 
taxes  be  imposed.  The  New  York  Chamber  of  Com- 
merce advocated  that  $214,000,000  be  raised  by  excise 
taxes  similar  to  those  in  vogue  in  England,  and  the 
American  Geographical  and  Statistical  Society  urged 
the  raising  of  $268,000,000  from  internal  revenue  duties 
and  $50,000,000  from  customs.^^ 

Congress  understood  better  the  magnitude  of  the 
struggle  and  the  temper  of  the  people,  and  instead  of 
providing  the  $90,000,000  asked  by  Chase,  passed  a 
comprehensive  internal  revenue  measure  on  July  1,  1862, 
which  was  estimated  to  produce  an  annual  revenue  of 
$150,000,000.  So  slow  was  it,  however,  in  framing  this 
Act  that  the  year  had  slipped  by  before  action  was 
taken,  and  Chase  was  compelled  in  the  interval  to  rely 
upon  loans  and  upon  issues  of  the  new  legal-tender 
notes.  The  full  effects  of  the  new  Act  were  not  felt 
until  the  fiscal  year  1863-64,  when  it  yielded 
$110,210,000. 

The  guiding  principle  of  this  measure  was  ''  the 
imposition  of  moderate  duties  upon  a  large  number 
of  objects,  rather  than  heavy  duties  upon  a  few."     It 

^".Ihid.,  p.   16. 
"Ubid.,  p.   18. 

308 


HOW  SHOULD  A  WAR  BE  FINANCED 

was  levied  upon  luxuries,  occupations,  processes,  evi- 
dences of  wealth,  income,  and  legacies.  *'  The  one 
necessity  of  the  situation,"  said  D.  A.  Wells,^^  "  was 
revenue,  and  to  obtain  it  speedily  and  in  large  amounts 
through  taxation ;  the  only  principle  recognized,  if  it 
can  be  called  a  principle,  was  akin  to  that  recommended 
to  the  traditionary  Irishman  on  his  visit  to  Donny brook 
Fair:  *  Whenever  you  see  a  head,  hit  it.'  Whenever 
you  find  an  article,  a  product,  a  trade,  a  profession,  or 
a  source- of  income,  tax  it."  At  the  same  time  Congress 
revised  the  tariff  so  as  to  provide  temporary  compen- 
satory duties  in  the  case  of  those  articles  upon  which 
excise  taxes  were  laid. 

In  order  to  provide  the  necessary  funds  while 
these  tax  measures  were  getting  under  way,  Congress 
had  authorized  a  loan  of  $500,000,000  in  six  per  cent, 
bonds  redeemable  at  the  pleasure  of  the  Government 
after  5  years  and  payable  after  20.^^  They  were 
known  as  the  "  five-twenties."  They  could  be  sold  at 
the  market  value,  the  interest  was  made  payable  in  gold, 
and  the  legal  tenders  could  be  funded  into  them.  This 
last  provision  would  have  resulted  in  an  automatic 
contraction  of  the  greenbacks  as  these  depreciated, 
but  Chase  recommended  its  repeal,^*  which  was  done. 
Chase  later  admitted  he  had  made  two  mistakes  in  the 
financial  arrangements  of  the  war:  one,  in  consenting 
that  the  United  States  notes  should  be  made  legal  ten- 
der; the  other,  in  advising  the  repeal  of  the  clause  which 
made  the  notes  convertible  into  bonds.^^  One  might 
lengthen  the  list  of  mistakes,  but  no  one  would  disagree 
with  Chase's  own  characterization  of  these  two  acts. 


'=  Cobden  Ckib  Essavs,  Second  Series,  p.  479. 
==Act  of  Febriiarv  25.   1862. 
""Report  on  the  Finances,"  1862,  p.  25. 
^'McCulIoch,   op.  ctf.,  p.   186. 

309 


WAR  COSTS  AND  THEIR  FINANCING 

The  loan  act  proved  to  be  of  little  immediate  assist- 
ance, for  Chase  interpreted  the  phrase  ' '  market  value  ' ' 
to  mean  par  value,  and  refused  to  sell  the  bonds  below 
par.^^  As  other  securities  bearing  a  greater  rate  of 
interest  were  on  the  market,  no  one  would  buy  the  five- 
twenties,  and  by  December,  1862,  only  $23,750,000  had 
been  sold.  For  his  attitude  on  this  point  Chase  may  be 
sharply  criticized,  for  by  refusing  to  sell  the  bonds  at 
their  market  value  he  was  compelled  to  resort  to  further 
issues  of  legal-tender  notes  and  to  various  makeshift 
devices.  He  was  averse  to  the  issue  of  long-time  bonds^^ 
and  made  use  of  short-time  and  temporary  loans  of 
every  conceivable  character  —  certificates  of  deposit, 
certificates  of  indebtedness,  Treasury  notes,  demand 
notes,  etc. 

' '  The  whole  system  of  short  loans  was  an  unfortunate 
makeshift.  Since  it  was  impossible  to  foresee  expenses  a 
year  ahead,  Chase's  budgets  were  all  estimates.  What 
he  did  was  to  raise  all  the  money  he  could,  in  every  pos- 
sible way;  to  refund  his  temporary  loans  into  bonds,  so 
far  as  he  could,  and  then  to  resort  to  new  short  loans  for 
pressing  needs.  When  everything  else  failed  he  issued 
more  legal  tenders."^®  But  Chase  was  still  firm  in  his 
advocacy  of  his  loan  policy.  "  The  chief  reliance,  and 
the  safest,"  he  wrote  in  his  annual  report  of  1862,^° 
"  must  be  upon  loans."  The  existing  loan  and  legal- 
tender  acts  he  thought  had  worked  well  and  should  be 

=" "  Report  on  the  Finances,"  1862.  p.  7. 

"  "  No  prudent  legislator  at  a  time  when  the  gold  in  the  world 
is  increasing  by  a  hundred  millions  a  year,  and  interest  must 
necessarily  soon  decline,  will  consent  to  impose  on  the  labor  and 
business  of  the  people  a  fixed  interest  of  six  per  cent,  on  a  great 
debt,  for  20  years,  unless  the  necessity  is  far  more  urgent  than 
is  now  believed  to  exist."      {Ibid.,  p.  25.) 

''A.  B.  Hart,  op.  cit.,  p.  242. 

""Report  on  the  Finances,"   1862,  p.  24. 

310 


I 


HOW  SHOULD  A  WAR  BE  FINANCED 

extended;  he  had  no  suggestions  to  make  concerning 
further  taxation,*" 

When  Congress  met  in  December,  1862,  it  was  con- 
fronted with  a  deficit  of  $270,900,000,  together  with 
unpaid  requisitions  amounting  to  $46,400,000.  Accord- 
ingly  it  authorized  the  third  issue  of  legal-tender  notes 
of  $100,000,000  to  provide  for  immediate  needs,*^  while 
a  new  Loan  Act*-  provided  for  $900,000,000  of  six  per 
cent,  bonds  redeemable  after  10  and  payable  after  40 
years,  and  a  variety  of  one-year,  two-year,  and  com- 
pound interest  notes.  The  National  Bank  Act  was  also 
passed.*^  Vigorous  efforts  were  now  made  to  sell  the 
five-twenty  bonds,  but  instead  of  applying  to  the  banks, 
Chase  decided  to  sell  them  directly  to  the  people.  An 
experienced  banker.  Jay  Cooke,  was  employed  as  general 
agent,  receiving  a  commission  of  three-eighths  of  one 
per  cent,  on  all  sales;  he  in  turn  employed  2,500  sub- 
agents  throughout  the  country,  which  he  flooded  with 
literature  setting  forth  the  advantages  of  Government 
bonds  as  investments.  By  these  energetic  methods  the 
sales  were  increased  to  nearly  $400,000,000  by  December, 
1863.**  This  method,  however,  was  criticized  and  was 
not  made  use  of  by  Chase  in  the  negotiation  of  the  next 
loan.*^ 

In  his  report  for  December,  1863,  Chase  estimated  the 

tax  receipts  for  the  fiscal  year  ending  June  30,  1864,  at 

$161,568,500,  leaving  $594,000,000  to  be  provided  by 

loans.*®    The  internal  revenue  receipts  had  proved  very 

disappointing,  amounting  to  only  $38,000,000,   instead 

*°Ibid.,  p   10.  ~ 

«Act  of  January   17.    1863. 

"Act  of  March  3,  1863. 

"Act  of  February  25,   1863. 

**"  Report  on  the  Finances,"  1863,  p.  14. 

*"  David  Kinley,  Independent  Treasury,  p.  106. 

*' "  Report  on  the  Finances,"  1863.  p.  5. 

311 


WAR  COSTS  AND  THEIR  FINANCING 

of  $85,000,000  as  estimated,  and  in  these  some  changes 
were  suggested.  It  is  interesting  to  note  in  this  report 
the  first  intimation  that  the  loan  policy  was  not  proving 
entirely  satisfactory.  One  or  two  short  quotations  will 
make  this  point  clear  :*^ 

No  one  can  be  more  profoundly  convinced  than  himself 
[he  wrote]  of  the  very  great  importanco  of  providing  even 
a  larger  amount  than  is  estimated  from  revenue.  To  check 
the  increase  of  debt  must  be,  in  our  circumstances,  a 
paramount  object  of  patriotic  solicitude.  The  Secretary, 
therefore,  while  submitting  estimates  which  require  largo 
loans,  and  while  he  thinks  it  not  very  difficult  to  negotiate 
them,  feels  himself  bound,  by  a  prudent  regard  to  possible 
contingencies,  to  urge  upon  Congress  efficient  measures  for 
the  increase  of  revenue.     .     .    . 

Hitherto  the  expenses  of  the  war  have  been  defrayed  by 
loans  to  an  extent  which  nothing  but  the  expectation  of  its 
speedy  termination  could  fully  warrant.     .     .     . 

These  statements  [estimates  of  receipts  and  expenditures] 
illustrate  the  great  importance  of  providing,  beyond  all  con- 
tingencies, for  ordinary  expenditures  and  interest  on  debt, 
and  for  the  largest  possible  amount  of  extraordinary  expendi- 
tures by  taxation.  In  proportion  to  the  amount  raised  above 
the  necessary  sums  for  ordinary  demands  will  be  the  diminu- 
tion of  debt,  the  diminution  of  interest,  and  the  improvement 
of  credit.  It  is  hardly  too  much  —  perhaps  hardly  enough  — 
to  say  that  every  dollar  raised  for  extraordinary  expenditures 
or  reduction  of  debt  is  worth  two  in  the  increased  value  of 
national  securities,  and  increased  facilities  for  the  negotiation 
of  indispensable  loans. 

Had  Chase  realized  and  acted  upon  this  truth  two  years 
earlier  many  of  the  monetary  and  financial  troubles  in 
our  later  financial  history  might  have  been  avoided.*^ 

"Ibid.,  pp  9,  10,  12. 

"  Cf.  H.  C.  Adams,  Puhlic  DeUs,  p.   130. 

312 


HOW  SHOULD  A  WAR  BE  FINANCED 

By  this  time  Congress,  too,  had  come  to  realize  the 
essential  weakness  of  the  loan  policy  and  directed  its 
energies  to  providing  larger  revenues  from  taxation. 
The  great  tax  bills  of  the  war  were  those  passed  in 
June,  1864,  which  provided  for  drastic  increases  in  the 
internal  revenue  taxes.  The  revenue  from  this  source, 
which  was  $110,210,000  for  the  fiscal  year  1864,  was 
thus  increased  to  $210,660,000  in  1865  and  $311,200,000 
in  1866.^^ 

In  order  to  meet  the  immediate  needs  of  the  Treasury, 
Congress  had  authorized  by  Act  of  March  3,  1864,  an 
issue  of  $200,000,000  of  bonds  bearing  interest  at  not 
over  six  per  cent,  and  redeemabk  in  10  to  40  years. 
These  were  popularly  known  as  the  ' '  ten-forties. ' '  For 
some  unaccountable  reason  Chase  decided  to  issue  these 
bonds  at  five  per  cent,  interest,  though  the  five-twenties 
bore  six  per  cent,  and  were  selling  at  a  price  to  yield 
5.4  per  cent.^''  The  result  was  disastrous,  and  bond 
buying  nearly  ceased,  only  $73,337,000  of  the  ten-forties 
being  sold  up  to  June  30,  1864.  Expenditures,  however, 
were  increasing  rapidly,  and  Chase  was  consequently 
forced  to  resort  once  more  to  short-time  loans.  He  issued 
one-year  and  two-year  notes,  compound  interest  notes, 
and  certificates  of  indebtedness.  Some  of  these  went 
into  circulation  and  others  were  absorbed  by  the  banks 
for  reserves,  displacing  to  this  extent  greenbacks.  In 
either  case  the  currency  was  inflated  and  prices  raised. 
By  some  writers  it  has  even  been  charged  that  Chase 
inflated  the  currency  purposely  so  that  he  could  market 
the  ten-forties  at  par  and  not  be  compelled  to  acknowl- 
edge that  he  had  made  a  mistake.    His  own  words  on  this 

"  F.  C.  Howe,  Taxation  and  Taxes  in  the  United  States  under 
the  Internal  Reveniie  System,  1701-1895,  p.  69. 

'"Hunt's  Merchants'  Magazine  and  Commercial  Review,  li 
(1864),  p.  43. 

313 


WAR  COSTS  AND  THEIR  FINANCING 

matter  were  as  follows  :^^  ' '  The  bonds  do  not  seem  to  be 
readily  taken  as  yet  by  the  people.  It  required  the 
printing  and  paying  out  of  $400,000,000  of  greenbacks 
before  the  five-twenty  six  per  cent,  bonds  could  be 
floated  easily  at  par,  and  it  will  probably  require  the 
circulating  issues  of  the  Government,  now  amounting  to 
about  $625,000,000,  to  be  increased  to  $650,000,000  or 
$700,000,000  before  the  people  will  be  induced  to  take 
five  per  cent,  bonds. ' '  "Whether  this  allegation  is  correct 
or  not,  there  is  no  doubt  that  this  was  Chase's  crowning 
mistake,  and  possibly  the  one  most  costly  to  the  country. 
Chase  resigned  as  Secretary  of  the  Treasury  on  June  29, 
1864,  for  political  reasons. 

It  is  not  necessary  to  trace  the  further  course  of  Civil 
War  financing.  Under  W.  P.  Fessenden  and  Hugh 
McCulloch  a  more  vigorous  policy  of  taxation  was 
enforced,  and  this,  coupled  with  military  victories,  had 
a  beneficial  effect  upon  the  national  finances.^^  The 
lessons  to  be  derived  from  this  brief  study  of  our  past 
experience  may  be  briefly  summarized  as  follows : 

(1)  The  fundamental  error  of  our  Civil  War  finance 
was  the  dependence  upon  loans  for  all  extraordinary 
expenditures. 

(2)  Resulting  from  this  in  large  measure  was  the 
issue  of  legal-tender  notes. 

(3)  The  undue  use  of  short  term  loans,  amounting 
to  85  per  cent,  of  all  loans  in  the  first  year,  and  60  per 
cent,  for  the  four  years  of  the  war,  tended  to  embarrass 
each  subsequent  operation. 

"  Quoted  by  D.  R.  Dewey,  Financial  History  of  the  United 
States,  p.  279. 

^^The  ratio  of  taxes  to  loans,  which  had  been  1:8.5  in  the  fiscal 
year  June  30,  1862,  was  reduced  to  1:.3.5  in  the  second  year  of 
the  war,  to  1:3.4  in  the  third,  and  finally  to  1:2.9  in  the"  fourth 
year  endinjr  .June  30,  1865.  (C.  .T.  Bullock,  "  Financing  the  War," 
in  Quarterly  Journal  of  Economics,  xxxi,  p.  363.) 

314 


HOW  SHOULD  A  WAR  BE  FINANCED 

(4)  The  attemj^t  to  issue  the  ten-forties  at  a  rate  of 
interest  loAver  than  the  market. 

"  It  appears,  then,"  couehules  II.  C.  Adams,^^  an  able 
critic  of  our  financial  history,  "  that  the  history  of  tln^ 
war  of  1861  .  .  .  bears  direct  testimony  against  the 
sufficiency  of  the  loan  policy." 

It  may  be  said  in  passing  that  the  financing  of  the 
Spanish  War  in  1898  offers  a  refreshing  contrast  to  the 
policy  followed  in  all  similar  emergencies  up  to  that 
time.  While  a  loan  of  .$200,000,000  was  authorized  for 
immediate  needs,  new  internal  revenue  taxes  were  also 
imposed  by  the  same  Act,  which  a  year  later  w^ere 
bringing  in  additional  revenues  of  $100,000,000.^*  Here 
we  have  presented  the  correct  policy  for  the  financial 
management  of  a  war  w'hieh,  as  II.  C.  Adams^"'  says, 
should  be  "  a  tax  policy  assisted  by  credits  rather  than 
a  credit  policy  assisted  by  taxes." 

The  lesson  of  the  Civil  War  has  an  immediate  prac- 
tical bearing  in  the  present  study,  for  the  same  two 
inquiries  may  be  raised  regarding  the  financing  of  the 
World  War.  Wliat  was  the  proper  proportion  between 
loans  and  taxes,  and,  after  the  determination  of  this 
question,  were  the  funds  raised  in  the  best  manner 
by  the  method  chosen  ? 

There  can  be  no  doubt  as  to  the  financial  policy  that 
was  pursued  by  all  the  belligerents  except  Great  Britain 
and  the  United  States.  It  must  be  characterized  as  an 
exclusive  loan  policy,  in  which  not  enough  was  raised 
by  revenues  to  meet  the  normal  budget  and  the  interest 
charges  on  the  debt.  Loans  were  even  used  to  pay  the 
interest    on   earlier    borrowings.      Heavier   taxes    were 

''^Public  Debts,  p.    133. 

""Report  on  the  Finances."  1000.  p.  44. 

"  Science  of  Finance,  p.  542. 

315 


WAR  COSTS  AND  THEIR  FINANCING 

levied,  to  be  sure,  but  in  no  ease  except  in  the  two 
countries  named  did  these  increase  rapidly  enough  to 
meet  the  growing  charges  of  the  debt  service  and  the 
ordinary  budget,  let  alone  make  any  contribution  to 
meeting  the  costs  of  the  war.  Neither  France,  Russia, 
Italy,  Germany,  or  Austria-Hungary  of  the  major 
belligerents,  nor  Belgium,  Serbia,  Rumania,  Bulgaria, 
or  Turkey  of  the  minor  belligerents  was  able  to  pay  a 
single  penny  toward  war  expenditures  out  of  taxes. 
Compared  with  such  a  record  the  inadequacy  of  Chase's 
loan  policy  seems  less  reprehensible.  The  statisiical 
facts  in  support  of  these  statements  are  given  for  the 
six  leading  European  belligerents  in  the  table  following. 

After  such  a  presentation  the  question  as  to 
whether  the  European  belligerents  should  have  pur- 
sued a  "  tax  policy  assisted  by  credits  "  rather 
than  a  loan  policy  may  appear  merely  academic. 
In  the  case  of  Great  Britain  alone  were  the  efforts 
to  raise  by  taxation  a  part  of  the  costs  of  the  war 
vigorous  and  sustained.  On  the  part  of  the  Conti- 
nental nations  the  feeling  seemed  to  be  general  that  the 
war  itself  constituted  a  sufficient  burden  without  adding 
that  of  taxation.  Germany,  as  has  been  pointed  out, 
followed  a  deliberate  and  premeditated  policy  in  her 
exclusive  reliance  upon  loans  to  meet  the  costs  of  the 
war;  when  she  finally  began,  in  the  third  year  of  the 
war,  to  increase  the  taxes  somewhat,  it  was  too  late,  and 
she  was  hardly  able  to  raise  enough  even  to  meet  the 
interest  charges  on  the  debt,  to  say  nothing  of  the 
civil  budget.  A  discussion  of  financial  policy,  there- 
fore, seems  to  resolve  itself  into  the  question  of  which 
was  better,  the  British- American  policy  on  the  one  hand, 
or  that  of  the  European  Governments  on  the  other. 

Judged  by  the  results,  which  is  the  ultimate  touch- 
316 


HOW  SHOULD  A  WAR  BE  FINANCED 


Table  Showing  the  Ix.^biutt  of  European  T.\x.'Vtion  to  Meet 
THE  Civil  Budget  and  Interest  Charges 


Fiscal  Year 


Interest  charges  |     Total  revenues 


GRE.\T  BRITAIN 


1915       

$113,344,480 

301,246,555 

636,252,470 

949,255,300 

1,332,668,000 

$1,133,470  000 

1916       

1,683,835  000 

1917 

2,867,140,000 

1918 

3,536,175,000 

1919 

4,445,105,000 

Total 

$3,332,766,805 

$13,665,725,000 

Five  years'  civil  budget  (1914, 

$987,464,845).... 

4,937,324,225 

Surplus  revenue  over  pre-war  normal  expenditure 
Five  years'  interest  charges 

$8,728,401,775 
3,332,766,805 

Surplus  revenues  over  normal  expenditure  and 
interest 

$5,395,634,970 

1914 

$273,242,000 

379,879,000 

666,603,000 

972,677,000 

1,113,570,000 

$796,821,380 

1915 

776,794,297 

1916 

963,286,447 

1917 

1,231,200,000 

1918 

1,326,800,000 

Total. 

$3,405,971,000 
$1,013,380,240) . . . 

lormal  expenditure 

$5,126,902,130 

Five  years' 

civil  buc 

enue  ove 

interest 

Iget  (1913, 

r  pre-war  r 
charges .  . . 

5,086,931,200 

Surplus  rev 
Five  years' 

$59,970,930 
3,405,971,000 

Deficit.  .  . 

$3,346,000,070 

1914 

$226,449,000 
240,000,000 
298,866,000 
371,209,000 

$1,449,000,000 

1915       

1,397,000,000 

1916            

1,457,000,000 

1917 

1,870,000,000 

Total  . . 

$1,136,524,000 
$1,547,124,000).. 

-e-war  normal  ex- 

$6,173,000,000 

Four  years'  c 

ivil  budget  (1913, 
venue  to  meet  pi 

6,188,496,000 

Deficit  of  re 
penditure 

$15,496,000 

Plus  interest 

1,130,524,000 

Total  deficit . 

$1,142,020,000 

317 


WAR  COSTS  AND  THEIR  FINANCING 


Budgets  op  Principal  European  Nations — Continued. 


Fiscal  Year 


Interest  charges 


Total 


1915  .... 

$109,998,237 
174,258,691 

254,818,892 
382,022,327 
577,000,000 

$609,340,114 

1916    

601,405,400 

1917    

761,000,000 

1918    

929,000,000 

1919    

971,000,000 

Total 

$1,498,038,147 
$632,046,000).... 

ormal  exjienditure 

$3,871,745,514 

Five  years' 

civil  budget  (1914, 

enue  over  pre-war  n 
interest  charges    .  . 

3,160,230,000 

Surplus  rev 
Five  years' 

$711,515,514 

1,498,098,147 

Deficit.  .  . 

$786,582,633 

1915. 
1916. 
1917. 
1918. 
1919. 


$317,000,000 

575,000,000 

890,250,000 

1,467,750,000 

1,975,000,000 


Total $5,225,000,000 

Five  years'  normal  civil  budget  (1914,     $851,- 
294,600) 


Surplus  revenue  over  pre-war  normal  expenditure 
Interest  charges  as  above 


Deficit  on  basis  of  estimated  revenues. 


$851,294,375 

829,270,125 

970,729,732 

1,116,134,367 

1,533,824,194 


55,301,253,193 
4,256,463,000 


51,044,790,193 
5,225,000,000 


.$4,180,209,807 


AUSTRIA-HUNGARY 


1915 

$1,144,976,400 

1916 

1,042,847,600 

1917 

1,313,528,600 

1918 

1,732,596,400 

Total 

$5,233,949,000 

Four  years'  civil  budget,  1913: 

Austria $625,811 ,000 

Hungary 444,360,000 

$1,060,171,000 

4,240,684,000 

Surplus  revenue  over  pre-war  normal  expenditure 
Four  years'  interest  charges  (estimated) 

$993,265,000 
1,394,000,000 

Deficit 

$400,735,000 

318 


HOW  SHOULD  A  WAR  BE  FINANCED 

stone,  the  matter  does  not  seem  open  to  doubt.  An 
exclusive  loan  policy  might  be  permissible  in  a  short 
and  victorious  struggle,  especially  when  an  indemnity 
was  collected  to  meet  the  costs,  but  no  financier  has  a 
right  to  maJ^e  the  success  of  financial  measures  con- 
tingent upon  military  strategy.  The  only  safe  plan  is 
to  prepare  for  a  long  struggle,  or  at  least  to  adopt  a 
plan  that  can  be  modified  to  meet  new  conditions  as 
they  develop.  It  may  safely  be  asserted  that  the 
finances  of  the  European  Entente  Allies  would  have 
broken  down  completely  had  it  not  been  for  the  timely 
aid  rendered  by  the  United  States,  and  that  the  utter 
financial  collapse  of  the  Central  Powers  was  a  powerful 
factor  in  their  final  defeat.  The  shortsightedness  and 
inadequacy  of  the  exclusive  loan  policy  is  sufficiently 
evidenced  by  these  facts,  and  it  does  not  seem  necessary 
to  pursue  this  phase  of  the  inquiry  further. 

In  Great  Britain  and  the  United  States,  however, 
there  was  a  very  lively  controversy  as  to  the  proportion 
in  which  loans  and  taxes  should  be  made  to  contribute 
to  the  costs  of  the  war.  Althougli  there  were  a  few 
extremists  who  advocated  a  taxation-only  or  loan-only 
program,  neither  of  these  extreme  policies  found  any 
serious  support.  In  fact,  in  view  of  the  gigantic 
expenditures  of  the  wai',  it  is  hardly  correct  to  say  that 
there  was  a  choice  between  these  two.  It  was  necessary 
at  the  outset  to  make  use  of  credit  on  a  hitherto  unknown 
scale.  But  at  the  same  time,  in  accordance  with  the  most 
appro^^d  financial  practice  of  providing  a  sound  basis 
for  public  credit,  the  scope  of  taxation  was  greatly 
extended.  Both  means  of  providing  the  necessary 
revenues  were  used.  Tlie  only  question  open  to  discus- 
sion was  that  of  the  proportion  in  which  loans  and  taxes 
should  be   employed.     As   a   matter  of  fact,   revenues 

319 


WAR  COSTS  AND  THEIR  FINANCING 

provided  about  one-fourth  of  the  receipts  in  Great 
Britain  and  about  one-third  in  the  United  States.  Was 
this  enough,  or  should  a  still  higher  proportion  have 
been  secured  from  taxation?  Without  attempting  to 
give  a  categorical  answer  to  these  questions,  it  will  suffice 
to  state  briefly  some  of  the  arguments  for  and  against 
a  heavier  taxation  policy. 

The  arguments  used  in  defense  of  a  large  use  of  loans 
were  of  two  kinds,  positive,  consisting  of  advantages 
accruing  from  the  issuance  of  loans,  and  negative,  con- 
sisting of  evils  arising  from  the  imposition  of  too  heavy 
taxes.  Perhaps  the  foremost  argument  in  favor  of  loans, 
implicit  if  not  always  expressed,  was  that  this  method 
works;  the  machinery  has  been  well  developed,  loans 
cause  little  resentment,  are  more  easily  obtained  than  an 
equal  amount  of  taxes,  yield  large  sums  with  a  minimum 
of  delay,  and  are  almost  indefinitely  expansible. 

It  was  also  urged  that  since  posterity  will  share  the 
benefits  of  the  war,  it  should  also  bear  some  of  the 
burdens.  Without  discussing  at  this  time^^  the  question 
as  to  whether  a  nation  can  shift  to  future  generations 
the  costs  of  the  war,  it  may  be  pointed  out  that  if  the 
loans  can  be  placed  abroad  such  a  shifting  may 
undoubtedly  be  effected  by  the  borrowing  nation.  But 
if  all  the  loans  are  domestic,  it  is  impossible  for  the 
nation  as  a  whole  to  shift  the  burden.  There  is  no 
difference  in  effect  if  the  Government  takes  savings  of 
$1,000  by  taxation  or  borrows  it  at  five  per  cent,  and 
then  adds  five  per  cent,  in  taxes,  assuming  that  the 
added  taxes  fall  upon  the  bondholders. 

This,  however,  does  not  always  prove  true,  and  in 
this  fact,  it  was  said,  is  found  another  reason  why  loans 
are   favored  by  those   who   determine   the   policy   and 

^  ='  See  Chapter  XI.  ' 

320 


HOW  SHOULD  A  WAR  BE  FINANCED 

advance  the  major  portion  of  tlie  funds.  If  the  taxes 
to  meet  interest  charges  and  redeem  the  principal  fall 
upon  the  bondholders  in  exact  proportion  to  their  hold- 
ings, it  can  make  no  real  difference  to  them  whether 
they  advance  the  money  to  the  Government  in  the  first 
place  in  the  form  of  a  loan  or  as  taxes.  But  the 
incidence  of  the  taxes  levied  to  ^amortize  the  loans  is 
seldom  so  exact.  "  Experience  has  never  yet  revealed 
a  tax  system  anything  like  as  strongly  graduated  for 
increasing  incomes  as  loan  subscriptions  are  normally 
found  to  be,  at  all  events  when  the  loan  required  is 
large.  Hence  the  rich  think  rightly  that  a  loan  hits 
them  much  less  severely  than  an  equivalent  le\^  would 
do."" 

To  the  bondliolder,  however,  there  is  an  advantage  in 
buying  a  bond,  even  though  his  future  taxes  may  be 
higher,  over  selling  securities  and  paying  a  lump  sum  in 
taxation,  for  the  bond  is  collateral  and  may  be  used  for 
borrowing  at  a  bank.  But  this  so-called  advantage  is 
a  two-edged  sword,  for  by  the  advocate  of  a  heavy 
taxation  policy  it  is  cited  as  a  disadvantage  since  it 
leads  to  inflation. 

The  advocates  of  a  loan  policy  have,  on  the  whole, 
devoted  most  attention  to  attacking  the  proposals  for 
heavier  taxation.  Of  the  many  objections  to  that  pro- 
gram perhaps  the  one  entitled  to  most  serious  con- 
sideration was  the  contention  that  too  heavy  taxation 
would  impair  the  incentive  to  effort.  As  the  main 
consideration  in  war  is  the  stimulation  of  the  production 
of  war  necessities,  and  this  is  secured  under  our  price 
and  profit  system  by  allowing  generous  rewards  to  the 
producers,  financiers  hesitate  to  impose  tax  burdens  that 

""A.  C.  Pigoii,  "The  Burden  of  War  and  Future  Generations," 
in  Quarterly  Journal  of  Economics,  Fel>ruary,  1919,  p.  248. 

321 


WAR  COSTS  AND  THEIR  FINANCING 

may  tend  to  lessen  production.  They  prefer  to  "  play 
safe."  Moreover,  a  sudden  imposition  of  very  heavy 
taxes  seriously  dislocates  existing  arrangements,  pre- 
vents the  meeting  of  commitments  already  made,  and 
forces  the  abandonment  of  contracts. 

In  addition  to  these  main  arguments,  but  distinctly 
subordinate  to  them,  the  following  objections  were  made  : 
Heavy  taxation  will  deplete  the  surplus  available  for 
investment ;  will  cause  popular  resentment ;  will  diminish 
the  funds  available  for  charity,  education,  and  similar 
purposes;  will  lead  to  the  expatriation  of  capital  or  its 
withdrawal  from  productive  use;  and,  finally,  such  a 
program  is  a  new  and  radical  departure. 

Turning  now  to  the  arguments  of  those  who  advocated 
a  policy  of  immediate  and  vigorous  taxation  in  order  to 
raise  from  this  source  a  considerable  portion  of  the 
current  costs  of  the  war,  it  is  found  that  they  run  the 
gamut  from  proposals  to  pay  the  entire  cost  by  taxes, 
or  to  conscript  all  incomes  over  $100,000,  to  an  insistence 
upon  a  "  reasonably  "  heavy  policy  of  taxation.  Here 
again  the  arguments  were  two-fold,  positive,  in  the 
advocacy  of  taxation,  and  negative,  in  attacks  upon  the 
loan  policy. 

In  favor  of  the  immediate  imposition  of  heavy  taxes 
that  should  ' '  cut  to  the  bone  ' '  it  was  urged  that  such  a 
policy  will  check  undesirable  consumption;  if  properly 
framed  it  will  discourage  extravagance  and  the  pro- 
duction of  nonessentials,  compel  economy,  and  drive 
out  labor  from  undesirable  industries.  As  an  immedi- 
ate and  complete  mobilization  of  the  human  and  material 
resources  of  a  country  is  essential  to  the  successful 
prosecution  of  war,  a  policy  of  heavy  taxation  is  desir- 
able not  only  for  the  sake  of  revenue  but  also  as  a  war 
measure. 

322 


HOW  SHOULD  A  WAR  BE  FINANCED 

Moreover,  a  program  of  heavy  taxation  can  best  be 
introduced  at  the  beginning  of  a  war,  when  the  demand 
for  new  capital  investment  has  fallen  off  as  the  result 
of  the  curtaihnent  of  normal  productive  industry,  and 
when,  on  the  other  hand,  the  immense  gains  from  war 
contracts  and  similar  activities  tend  to  make  the  burden 
relati\'ely  less.  Translating  these  abstract  considerations 
into  a  concrete  tax  program,  the  advocates  of  heavy 
taxation  approved  of  highly  progressive  income  and 
estate  taxes,  excess  and  war  profits  taxes  running  as 
high  as  80  and  90  per  cent.,  and  heavy  consumption  or 
excise  taxes  upon  all  nonessentials. 

It  was  against  an  excessive  loan  policy,  however,  that 
the  advocates  of  vigorous  taxation  directed  most  of  their 
attacks.  The  major  danger  was  recognized  as  inflation, 
and  this  aspect  of  the  situation  received  most  attention. 
Said  A.  C.  Miller  of  the  Federal  Reserve  Board  :^^ 

The  danger  of  the  loan  policy  is  that  by  deluding  itself 
with  a  notion  that  it  is  putting  the  burden  onto  the  future 
it  \vi\\,  through  resort  to  fatuous  and  easy  expedients,  put 
the  burden  both  on  the  present  and  the  future.  This  will 
liappen  if  the  loan  policy,  failing  to  induce  a  commensurate 
increase  in  the  savings  fund  of  the  nation,  degenerates 
through  the  abuse  of  banking  credit,  into  inflation  —  raising 
prices  against  the  great  body  of  consumers  as  well  as  against 
the  Government,  thus  needlessly  augmenting  the  public  debt 
and  increasing  the  cost  of  living  just  as  taxes  would.  The 
policy  of  financing  war  by  loans,  therefore,  will  be  but  a 
fragile  and  deceptive  and  costly  support  unless  every  dollar 
obtained  by  the  Government  is  matched  by  a  dollar  of 
spending  power  relinquished  by  the  community  —  in  other 
words,  will  fail  and  will  develop  into  inflation  unless  the 
dollars  which  are  subscribed  to  the  bonds  of  the  Govcrnmont 
are  real  dollars,  the  result  of  real  savings  and  of  real 
retrenchment. 

°* "  War  Finance  and  the  Federal  Reserve  Banks,"  in  Financial 
Mobilization  for  War,  p.   145. 

323 


WAR  COSTS  AND  THEIR  FINANCING 

There  were  many  who  denied  that  the  loan  policy  of 
the  belligerents  was  responsible  for  the  inflation  and 
high  prices  that  have  accompanied  the  war;  these  were 
due,  they  said,  to  the  increase  of  money,  to  scarcity  of 
goods,  or  to  other  causes.  It  may  be  admitted  that  if 
private  expenditures  were  cut  down  by  an  amount  equal 
to  the  bonds  issued  for  war  purposes,  there  would  be  no 
inflation;  that  if  the  total  amount  of  bank  credit  in 
existence  were  not  increased,  that  used  for  the  payment 
of  bonds  being  offset  by  equivalent  economies  on  the 
part  of  the  public,  there  would  result  no  inflationary 
effects.  But  this  is  to  suppose  what  did  not  happen. 
The  expenditures  financed  by  the  issue  of  bonds  in  fact 
represented  an  addition,  and  were  taken  up  by  the 
creation  of  bank  credit  which  represented  an  addition, 
to  normal  transactions. 

As  a  result  of  inflation,  it  was  further  argued,  the 
Government  competed  with  its  citizens  for  supplies, 
prices  were  raised,  the  purchasing  power  of  each 
successive  issue  of  bonds  was  reduced,  extravagance  was 
invited,  variations  in  incomes  were  caused,  much 
unnecessary  hardship  was  brought  about,  and  the  cost 
of  the  war  was  increased.  It  has  been  estimated  that  the 
cost  of  the  Civil  War  was  enhanced  by  $600,000,000 
because  of  the  issue  of  greenbacks.  The  cost  of 
the  World  War  must  have  been  augmented  by  billions 
of  dollars  as  a  result  of  the  inflation  in  the  form  both 
of  bank  notes  and  bank  credit  which  has  accompanied 
the  enormous  issues  of  bonds. 

Finally,  it  was  urged  that  an  undue  dependence  upon 
loans  complicates  after-war  problems;  if  war  costs  were 
paid  out  of  taxes,  there  would  be  no  such  difficulties; 
that  bonds  are  rarely  bought  from  voluntary  savings; 
that  these  must  be  enforced  by  heavy  taxation;  that  a 

324 


HOW  SHOULD  A  WAR  BE  FINANCED 

loan  policy  simply  represents  the  mortgage  of  the  masses 
to  the  classes,  as  the  future  taxes  to  redeem  the  bonds 
will  almost  certainly  fall  relatively  more  heavily  upon 
the  former. 

The  conclusion  to  be  drawn  from  these  opposing 
counsels  seems  to  be  that  loans  and  taxes  are  both  neces- 
sary; that  the  best  system  is  the  one  that  secures  the 
funds  from  savings  rather  than  from  bank  borrowings ; 
that  this  is  better  secured  by  taxation  than  by  loans; 
and  finally,  that  the  actual  practice  of  the  European 
belligerents  was  distinctly  inflationary  and  inadequate. 
The  policy  of  this  country  was  to  finance  the  war  as  far 
as  seemed  practicable  by  increased  taxation  and  to  raise 
the  rest  of  the  needed  funds  by  loans.  Larger  sums 
could  undoubtedly  have  been  raised  by  heavier  taxation, 
and  changes  in  particular  taxes  might  have  been  made 
with  advantage,  but  conceived  as  a  war-finance  policy, 
that  of  the  United  States  must,  on  the  whole,  be  com- 
mended. The  w^eakness  lay  in  the  enormous  sums  that 
had  to  be  raised  by  means  of  loans  and  the  methods 
pursued  in  securing  these  sums,  with  the  attendant  infla- 
tion of  bank  credit  and  rise  in  prices.  In  view  of  the 
fact  that  the  expenditures  far  outran  the  customary 
annual  savings  of  the  people,  it  would  have  been  impos- 
sible under  any  system  to  have  paid  for  the  war  out  of 
current  savings.  The  best  system,  therefore,  was  that 
which  would  promote  the  maximum  amount  of  saving 
on  the  part  of  the  people  while  at  the  same  time  it 
developed  the  greatest  possible  military  and  economic 
effort  toward  winning  the  war.  This  end  was  well 
achieved  in  the  United  States.^'* 

^'  For  a  fuller  discussion  of  this  latter  point,  see  an  article  by 
the  writer,  "  Economic  Orsanization  for  War,"  in  the  Americayi 
Political  Science  Review,  November,  1920. 

325 


CHAPTER  XI 

FINANCING  EUROPE  AFTER  THE  WAR 

Foreign  trade  of  the  United  States  as  a  belligerent  —  Exports 
and  imijorts  by  regions  —  The  balance  of  trade  —  Europe's 
need  for  capital  —  Greatest  supplies  to  be  found  in  the 
United  States  —  How  can  this  be  made  available  —  Machinery 
by  which  loans  can  be  advanced  to  Europe  —  Proposals  for 
the  extension  of  short  time  credit  —  Long  term  credit  —  Con- 
clusions. 

After  the  entry  of  the  United  States  into  the  war,  her 
foreign  trade  was  increasingly  regulated  and  controlled 
for  the  single  purpose  of  making  it  contribute  to  the 
winning  of  the  war.  Imports  were  restricted  to  com- 
modities that  were  needed  for  war  purposes,  either  on 
our  own  or  on  our  allies'  account.  Because  of  the 
shortage  of  shipping  they  were  taken  for  the  most  part 
from  the  nearest  available  market.  Exports  to  non- 
belligerent countries,  moreover,  were  cut  down  to  the 
very  minimum.  Their  shipment  to  any  particular 
country  was  determined  by  the  necessity  of  paying  for 
goods  purchased  from  that  country  or  of  securing  to 
a  friendly  neutral  the  minimum  necessary  for  it  to 
maintain  its  customary  economic  activities,  and  towards 
the  end  of  the  struggle  by  the  necessity  of  exerting  a 
favorable  influence  upon  the  exchange  situation.  All 
the  supplies  and  all  the  available  tonnage  that  could  be 
spared  from  domestic  use  and  from  the  most  pressing 
needs  of  neutral  countries  were  diverted  to  the  service  of 
the  Allies  and  our  own  army  in  Europe. 

There  was  done  in  the  "World  War  what  probably  was 
never  accomplislied  before :    The  foreign  trade  of  whole 

326 


FINANCING  EUROPE  AFTER  THE  WAR 

nations  was  used  as  a  huge  economic  weapon  against 
enemy  countries  and  was  diverted  hither  and  yon  as 
to  serve  best  the  Allied  cause.  It  is  not  possible  to 
describe  the  financing  of  the  war  without  taking  account 
of  the  way  in  which  foreign  trade  was  made  to  con- 
tribute directly  to  the  success  of  our  arms.  The  pay- 
ment of  money  and  the  use  of  credit  constituted,  after 
all,  only  the  machinery  by  which  the  title  to  goods  and 
services  was  transferred.  The  basic  fact  was  the  move- 
ment of  ships  and  supplies,  of  food  and  men  as 
expeditiously  and  in  as  large  volume  as  possible  to 
points  where  they  were  needed.  How  successful  this 
movement  was  is  indicated  roughly  by  the  statistics  of 
our  foreign  trade,  and  yet  these  by  no  means  measure 
the  whole  service,  for  they  do  not  include  the  shipments 
on  Government  account  to  the  American  Expeditionary 
Force  abroad. 

Because  of  our  enormous  sales  to  belligerent  Europe, 
our  exports  showed  a  steady  growth  during  the  war, 
reaching  a  climax  in  the  year  ending  June  30,  1917, 
when  they  reached  the  stupendous  total  of  $6,290,048,- 
394.  During  the  next  year  there  was  a  slight  decline, 
to  $5,919,711,371,  but  a  new  high  record  of  exports 
was  set  for  12  months  ending  June  30,  1919,  with  a 
total  of  $7,225,084,257.  The  imports  showed  a  similar 
movement  except  that  the  maximum  was  reached  in 
1918.  Both  of  these  records,  however,  were  far  sur- 
passed by  the  unprecedented  exports  and  imports  for 
1920.  As  the  latter  increased  more  than  the  former, 
the  excess  of  exports  over  imports  was  considerably 
reduced  below  that  of  the  previous  year.  The  followinij^ 
table  shows  the  actual  figures  for  the  four  years,  1917 
to  1920,  together  with  the  resulting  favorable  balance  of 
trade : 

327 


WAR  COSTS  AND  THEIR  FINANCING 


Exports,  Imports,  and  Balance  of  Trade, 

1917-1920 

Year  ending 
June  30 

Total 
exports 

Total 
imports 

Excess  of  exports 
over  imports 

1917 

1918 

1919 

1920 

$6,290,048,394 
5,919,711,371 
7,225,084,257 
8,111,176,131 

$2,659,355,185 
2,945,655,403 
3,095,876,582 
5,238,746,580 

$3,630,693,209 
2,974,055,968 
4,129,207,675 
2,872,429,551 

Owing  to  the  depreciation  of  money  which  was  taking 
place,  this  growth  in  the  value  of  foreign  trade  is  con- 
fusing and  may  easily  lead  to  false  conclusions.  The 
increase  in  the  value  of  domestic  exports  during  1918 
was  150  per  cent,  over  that  of  1914,  the  last  pre-war 
year,  but  if  the  values  of  1918  be  reduced  to  the  pre- 
war standard,  the  actual  increase  is  found  to  be  only 
35.5  per  cent.^  The  total  figures,  however,  do  not  tell 
the  story.  It  is  necessary  to  analyze  them  still  further 
and  to  classify  our  foreign  trade  by  groups  of  countries. 
Tills  is  attempted  in  the  following  table : 


Domestic  Exports  from  the  United  States  by  Geographical 
Divisions 

(In  millinns^ 


1914 


1915 


1916 


1917 


1918 


1919 


Europe: 
Allied . . 
Enemy. 
Neutral . 


922.7 
367.0 
181.5 


$1,544.8 

30.0 

369.5 


$2,666.1 

.5 

305.7 


,929.4 

2.2 

392.9 


$3,605.6 

0.3 

126.3 


t,131.0 

28.2 
475.6 


Total.  .  ..  . 
North  .\merica. 
South  America. 

Asia 

Oceania 

Africa 


$1,471.2 

509.9 

124.0 

113.1 

83.3 

27.8 


$1,944.3 

455.2 

97.5 

113.2 

77.4 
28.4 


$2,972.3 

702.7 

177.6 

277.8 

98.2 

43.4 


54.324.5 

1,163.8 

259.5 

3S0.2 

109.3 

52.7 


,732.2  $4,634.8 
1,236.4    1,291.9 


314.5 

447.4 

134.9 

54.3 


400.9 

603.9 

208.4 

85.2 


Total $2,329.7  $2,716.2  $4,272.2  $6,290.0 '$5,919.7  $7,225.1 

^  This  calculation  was  made  by  assuming  a  price  index  number 
of  185  for  1918,  as  compared  with  100  for  1914. 

328 


FINANCING  EUROPE  AFTER  THE  "WAR 

It  is  clear  from  this  table  that  the  increase  in  domestic 
exports  from  the  United  States  was  due  in  large 
measure  to  the  growth  of  our  trade  with  belligerent 
Europe.  Two-thirds  of  the  increase  that  took  place  in 
the  period  1914  to  1918  went  to  that  section  of  the  world. 
Between  these  two  years  the  trade  with  the  neutral 
countries  of  Europe,  from  which  it  was  feared  that 
Germany  would  be  able  to  draw  supplies,  actually 
declined  some  30  per  cent.  The  growth  of  exports  to 
other  countries  was  due  largely  to  the  fact  of  the  with- 
drawal of  European  belligerents  from  their  customary 
trade,  which  left  to  this  country  the  obligation  of  fur- 
nishing them  with  their  needed  supplies.  If  values  were 
reduced  to  the  1914  basis  for  the  year  1918,  there  would 
be  recorded  in  most  cases,  not  an  increase,  but  an  actual 
falling  off  in  trade. 

The  following  table  shows  the  imports  into  the  United 
States  from  the  principal  regions  of  the  world: 


Imports  Into  the  United  States  by  GEOGRAPmcAL  Divisions 

{In  millions) 


1914 

1915 

1916 

1917 

1918 

1919 

Europe 

North  America. 
South  America. 
Asia 

.S895.6 

427.4 

222.7 

286.9 

42.1 

19.1 

$614.3 

473.1 

261.5 

247.8 

52.5 

24.9 

$616.2 

591.9 

391.5 

437.2 

96.2 

64.7 

$610.5 

766.1 

542.2 

615.2 

65.3 

60.0 

$411.6 
918.3 
567.4 
826.2 
146.2 
75.9 

$372.9 

1,052.6 

568.4 

830.9 

Oceania 

Africa 

190.0 
81.1 

Total 

$1,893.9 

$1,674.2 

$2,197.9 

$2,659.3 

$2,945.6 

$3,095.9 

The  significant  feature  of  the  import  statistics  is  the 
great  falling  off  in  imports  from  Europe.     After  the 

329 


WAR  COSTS  AND  THEIR  FINANCING 

tiglitening  of  the  British  blockade,  and  especially  after 
the  entry  of  the  United  States  into  the  war,  shipments 
from  the  enemy  powers  ceased  almost  entirely,  while 
those  from  the  European  Allies  shrank  to  almost  half 
of  their  pre-war  amounts,  owing  to  the  absorption  of 
industry  in  war  activities  and  the  consequent  decline 
in  exportable  surplus. 

It  has  already  been  pointed  out  (Chapter  III)  that 
as  a  result  of  the  enormous  sales  of  our  commodities  to 
Europe,  by  means  of  which  we  had  bought  back  Ameri- 
can securities  held  abroad,  the  United  States  had  reached 
the  position  of  creditor  nation  by  the  middle  of  the  year 
1917.  Since  that  time,  however,  still  larger  trade 
bidances  have  piled  up.  Europe  and  the  rest  of  the 
world  have  now  become  debtor  to  the  United  States 
to  an  amount  which  has  been  estimated  at  about 
$9,000,000,000.  The  annual  interest  charge  on  this  sum 
will  amount  to  about  $450,000,000.  As  a  result  of  the 
upbuilding  of  our  merchant  marine,  the  sums  that  were 
previously  paid  to  foreign  shipowners  for  freight 
service  will  be  saved.  Assuming  that  other  charges, 
such  as  tourists'  expenses  abroad,  remittances  of  emi- 
grants, commissions  and  insurance  charges,  and  similar 
items,  remain  at  the  same  level  as  they  were  before  the 
war,  though  it  is  altogether  probable  that  they  will  be 
lessened,  the  net  result  of  the  changes  will  be  that 
instead  of  the  United  States  being  under  the  necessity 
of  remitting  annually  to  Europe  some  $500,000,000  to 
meet  these  various  charges,  we  shall  ourselves  be  in 
receipt  of  perhaps  $200,000,000  to  $300,000,000  a  year. 
The  United  States  is  in  fact  at  the  present  moment  a 
creditor  nation  to  this  extent,  and  only  the  abnormal 
economic  situation  in  Europe  could  prevent  the  full 
effects  of  this  change  from  being  felt.     Any  further 

330 


FINANCING  EUROPE  AFTER  THE  WAR 

movement  of  trade  balances  in  favor  of  the  United 
States  will  still  further  increase  the  amount  due  annu- 
ally from  other  countries. 

If  this  balance  Avere  sent  us  at  the  present  time,  it 
would  create  an  embarrassing  situation  in  the  United 
States,  for  it  is  desirable  to  maintain  our  exports  at 
the  present  level  in  order  to  provide  employment  for  the 
demobilized  soldiers  and  to  take  up  the  slack  of  the 
after-war  period.  Most  of  the  European  countries,  how- 
ever, are  taking  steps  to  reduce  their  imports  to  the 
lowest  possible  level,  so  as  to  assist  the  revival  of  their 
own  domestic  industries,  as  well  as  to  correct  the 
unfavorable  rates  of  exchange  which  are  handicapping 
them  in  their  purchase  of  needed  supplies.  Practically 
every  country  has  prohibited  the  importation  of  luxuries 
and  is  limiting  its  other  purchases  to  raw  materials  and 
machinery  and  equipment.  But  it  wuU  be  necessary  for 
Europe  to  continue  to  purchase  from  the  United  States 
during  the  next  few  years  large  quantities  of  foodstuffs 
and  cotton,  lumber,  hides,  copper,  petroleum,  and  some 
coal,  and  also  manufactured  goods  such  as  railroad 
equipment,  agricultural  machinery,  and  some  consum- 
able commodities. 

In  return  for  these  purchases  it  is  unlikely  that 
Europe  will  be  able  to  export  any  considerable  amount 
of  merchandise  or  goods.  Some  increase  of  exports  of 
raw  materials  or  semimanufactured  articles  may  be 
expected  from  some  of  the  European  countries,  and  a 
not  inconsiderable  part  of  their  indebtedness  may  be 
canceled  by  an  increase  of  our  imports  of  jute  and  tea 
from  India,  of  tin  and  rubber  from  the  Straits  Settle- 
ments, of  coffee  from  Java,  of  wool  from  Australia,  and 
of  other  articles  from  the  dependencies  of  European 
nations,  the  value  of  which  might  be  set  against  our 

331 


WAR  COSTS  AND  THEIR  FINANCING 

claims  upon  those  nations  themselves.  There  is  a  limit, 
however,  to  the  amount  of  such  commodities  that  can  be 
spared  by  Europe  or  absorbed  by  our  own  industries  or 
people.  For  the  immediate  future  the  United  States 
must  content  itself  with  further  promises  to  pay  in  the 
future  in  the  form  of  securities  of  one  sort  or  another. 

Ultimately  the  balance  in  our  favor  wall  have  to  be 
liquidated  by  larger  imports  of  goods.  By  some  this  is 
regarded  as  a  wholly  undesirable  outcome,  and  the  fear 
is  expressed  that  American  workmen  will  to  that  extent 
be  deprived  of  an  opportunity  to  work.  The  fear  is  an 
idle  one.  The  large  so-called  favorable  balances  of  trade 
of  the  two  years  folloAving  the  entry  of  the  United 
States  into  the  war  were  to  some  extent  at  least  the 
result  of  self-denial  on  the  part  of  the  American  people. 
We  denied  ourselves  luxuries  and  comforts  and  volun- 
tarily imposed  restrictions  upon  our  consumption  of 
certain  foodstuffs  in  order  that  these  or  other  supplies 
might  be  furnished  the  Allies  in  Europe.  It  is  quite 
clear  that  this  program  should  be  continued  and  that 
the  next  few  years  must  be  marked  by  a  lower  stand- 
ard of  comfort  than  would  be  ni^eessary  if  we  are  to 
attempt  to  help  supply  Europe  with  consumable  goods 
for  immediate  use  and  with  capital  for  reconstruction 
purposes.  When  this  period  of  abstinence  shall  have 
ended,  it  will  surely  not  be  a  matter  of  regret  if  we  shall 
begin  to  collect  some  of  the  debt  owing  us  in  the  form 
of  larger  imports  of  commodities.  The  national  income 
of  the  American  people  will  then  be  increased  beyond 
the  amount  of  their  own  production  by  the  excess  of  the 
merchandise  imports  over  exports. 

For  the  immediate  present,  however,  the  United 
States,  instead  of  collecting  the  sums  due,  is  under  the 
necessity  of  advancing  still  further  amounts  to  aid  in 

332 


WAR  COSTS  AND  THEIR  FINANCING 

the  rehabilitation  and  reconstruction  of  Europe.  During 
the  war  the  purchases  by  the  Allies  from  this  country- 
were  financed  with  money  advanced  by  the  United  States 
Government.  For  this  purpose  the  sum  of  $10,000,000,- 
000  was  appropriated,  of  which  some  $9,700,000,000  has 
been  lent.  So  long  as  any  part  of  this  fund  remained 
available,  no  special  pressure  was  felt  by  the  European 
Governments  to  whom  it  was  being  loaned,  as  it  was 
expected  that  pressing  European  claims  could  be  offset 
against  the  credits  in  this  country.  But  now  that  this 
fund  is  used  up,  the  question  presents  itself  as  to  how 
further  exports  to  Europe  are  to  be  financed.  The  fall 
in  the  rates  of  foreign  exchange  in  the  European  coun- 
tries, which  showed  itself  as  this  fund  approached 
exhaustion,  indicates  the  extent  to  which  reliance  had 
been  placed  upon  it. 

So  far  as  the  non-European  countries  of  the  world 
are  concerned,  those  which  were  not  directly  affected 
by  the  war,  no  special  problem  seems  to  be  presented,  as 
they  should  be  able,  with  the  normal  product  of  their 
unimpaired  industries,  to  purchase  the  needed  supplies. 
So  far  as  they  are  borrowers  their  needs  to-day  differ 
in  no  essential  respect  from  those  existing  before  the 
war,  while  their  credit  is  probably  improved.  The  dis- 
cussion may  therefore  be  confined  to  the  European 
countries. 

The  present  need  of  Europe  is  undoubted.  Food 
and  other  consumable  commodities,  raw  materials, 
machinery,  tools,  and  capital  in  all  forms  are  necessary 
for  the  economic  rehabilitation  and  reconstruction  of  the 
belligerent  and,  to  a  lesser  extent,  of  the  neutral 
countries.  An  estimate  in  the  New  York  Times-  placed 
the  European  financial  requirements  for  the  coming  12 

^  July  11,  1919.     See  also  Journal  of  Commerce,  July  12,  1919. 

333 


WAR  COSTS  AND  THEIR  FINANCING 

months  at  about  $2,000,000,000.  This  sum  "  probably 
will  cover  the  more  pressing  needs  and  in  all  likelihood 
will  suffice  to  start  European  industry  and  carry  it  for 
the  coming  year."  On  the  other  hand,  the  Federal 
Reserve  Board  announced''  that  considerably  more  than 
$3,000,000,000  must  be  raised  here  by  private  initiative 
if  the  export  trade  of  the  United  States  is  to  be  kept 
at  its  present  level.  The  conclusion  was  reached  that 
"  means  must  be  found  during  1919  for  the  financing 
of  about  $3,000,000,000  of  new  obligations,  and  for  the 
renewal  of  perhaps  $600,000,000  of  old  ones.  This 
makes  a  gigantic,  probably  an  unprecedented,  financial 
problem."  No  statistics  exist  which  show  exactly  how 
much  credit  actually  has  been  granted  to  Europe  dur- 
ing the  last  twelve  months,  but  the  excess  of  exports 
over  imports  may  be  accepted  as  a  fair  measure  of  such 
financing.  During  the  fiscal  year  ending  June  30,  1920, 
the  United  States  exported  to  Europe  $1,864,155,166 
and  received  in  return  $1,179,460,699,  the  difference  of 
$3,684,694,467  having  been  in  large  measure  sold  on 
credit. 

This  capital  is  needed  for  the  reconversion  of  fac- 
tories which  had  been  devoting  themselves  to  war  pro- 
duction. It  has  been  necessary  to  alter  the  machinery 
so  as  to  make  it  suitable  for  peacetime  production,  and 
in  some  cases  completely  to  reequip  the  factories  and 
works.  Moreover,  in  the  case  of  such  establishments, 
larger  capital  is  now  required  for  the  sake  of  purchasing 
raw  materials,  of  replenishing  exhausted  stocks,  and  of 
meeting  charges  until  the  new  output  can  be  sold.  In 
many  cases  repairs  have  been  neglected,  and  these  will 
now  have  to  be  made  at  higher  prices.  In  the  devastated 
areas  the  demand  for  capital  comprises  materials  for  the 

^Bulletin,  June,  1919. 

334 


FINANCING  EUROPE  AFTER  THE  WAR 

complete  reconstruction  of  destroyed  buildings  or  the 
entire  equipment  of  industries  of  which  the  machinery 
has  been  destroyed,  the  stocks  of  raw  material  have 
been  carried  away,  and  the  markets  have  been  lost. 
Loans  will  have  to  be  made  to  these  areas  for  periods 
long  enough  to  enable  them  to  reconstruct  their  estab- 
lishments and  regain  their  trade  connections.  On  the 
whole,  the  demand  now  consists  very  largely  of  invest- 
ment loans  for  constructional  work,  which  will  be 
secured  by  mortgages  upon  fixed  capital,  rather  than, 
as  has  usually  been  the  case,  by  short  term  credit  upon 
the  security  of  consumable  goods  to  be  met  out  of  the 
sale  of  these  goods.  As  the  needs  are  different,  so  the 
character  of  the  credit  will  have  to  be  different. 

It  is  clear  that  under  existing  conditions  the  energies 
of  Europe,  especially  of  the  devastated  regions,  will  be 
fully  absorbed  in  the  work  of  reconstruction  and  of 
restoring  industries  to  a  normal  footing.  For  this  task 
the  belligerents  will  need  all  the  help  that  they  can 
secure.  For  an  indefinite  period,  which  may  be  one  year 
or  five  years,  Europe  will  be  compelled  to  borrow  large 
amounts  of  capital.  During  this  period  it  will  scarcely 
be  possible  for  the  borrowing  countries  to  attempt  to 
repay  their  foreign  indebtedness.  Not  only  will  they 
probably  be  unable  to  produce  enough  for  their  own 
requirements  and  to  meet  the  interest  charges  abroad, 
but  they  will  even  be  under  the  necessity  of  borrowing 
further  sums. 

During  the  period  of  reconstruction  the  peoples  of 
Europe  will,  on  the  whole,  be  too  poor  to  indulge  in  the 
purchase  of  any  consumable  commodities  except  to  meet 
their  most  urgent  necessities.  On  the  other  hand,  as 
has  just  been  pointed  out,  their  needs  for  capital  goods 
will  be  great.     We  may  therefore  expect  the  character 

335 


WAR  COSTS  AND  THEIR  FINANCING 

ol'  our  foreign  trade  to  be  determined  in  part  by  this 
fact.  Fewer  luxuries  and  high  priced  consumable  com- 
modities will  be  bought,  but  on  the  other  hand,  we  may 
expect  to  see  an  increase  in  the  purchase  by  Europe  of 
construction  material,  machinery,  implements,  tools,  and 
capital  goods  of  various  kinds  as  well  as  raw  materials. 

A  complication  in  the  normal  movement  of  foreign 
trade  exists  in  the  state  of  the  foreign  exchanges.  These 
are  highly  unfavorable  in  the  case  of  all  the  leading 
belligerent  countries  of  Europe  which  are  likely  to  bor- 
row most  largely  of  the  United  States  in  the  next  few 
years.  Such  a  situation  acts  in  itself  as  an  obstacle  to 
the  importation  into  those  countries  of  American  goods. 
On  the  other  hand,  there  is  given  thereby  a  stimulus  to 
exports  to  the  United  States.  Not  content  with  the 
normal  effect  of  rates  upon  the  movement  of  foreign 
trade,  several  of  the  European  nations  have  continued 
their  war  embargoes  upon  imports  or  have  added  new 
ones,  which,  however,  are  directed  for  the  most  part 
against  the  importation  of  luxuries  or  nonessentials. 
The  present  situation  gives  point  to  the  movement  for 
the  larger  use  of  dollar  exchange.  If  exporters  from  the 
United  States  to-day  take  their  pay  in  sterling  exchange 
or  other  foreign  currencies,  they  are  exposed  to  loss 
through  fluctuations  in  sterling  or  other  rates.  Credits 
should  therefore  be  drawn  in  dollar  exchange. 

To  meet  the  demands  of  the  war-swept  countries  of 
Europe  will  require  enormous  supplies  of  capital.  From 
what  quarters  can  these  be  drawn?  The  United  States 
will  probably  have  to  furnish  the  major  share,  but  other 
nations  may  be  relied  upon  to  supply  no  inconsiderable 
pai-t.  The  European  neutrals,  Japan  and  possibly  some 
of  the  South  American  countries,  as  well  as  Great 
Britain  and  the  British  colonies  will  be  able  to  advance 

336 


FINANCING  EUROPE  AFTER  THE  WAR 

part  of  the  sum  required.  In  some  of  these  countries 
large  profits  were  made  during  the  course  of  the  war, 
and  it  is  not  unreasonable  to  expect  that  some  of  these 
war  profits  will  be  devoted  to  the  work  of  reconstruction. 
After  all  this  is  said,  however,  it  remains  true  that 
the  main  dependence  must  be  the  United  States.  The 
needs  of  Europe  will  be  for  raw  materials,  railway 
equipment,  agricultural  machinery,  and  similar  forms 
of  capital;  of  some  of  these,  as  cotton,  petroleum,  and 
copper,  this  country  is  the  main  source  of  supply,  while 
of  others  it  is  the  largest  producer. 

Has  the  United  States  an  available  surplus?  It  is 
necessary  to  answer  this  question  in  order  to  determine 
whether  the  needs  of  Europe  can  be  taken  care  of  by 
this  country.  On  this  point  the  answer  must  be  an 
undoubted  affirmative.  The  investment  in  Liberty  loans, 
which  averaged  about  $10,000,000,000  per  year  during 
the  two  years  1917-1919,  may  be  taken  as  a  partial 
measure  of  the  savings  possible  for  the  American  people. 
The  normal  needs  of  domestic  industries  for  new 
capital  has  been  estimated  at  about  five  billion  dollars 
per  annum.  Even  if  it  be  granted  that  the  savings  will 
be  less  and  the  domestic  demands  greater,  there  would 
still  be  left  a  sum  sufficient  to  meet  the  more  pressing 
needs  of  Europe  for  reconstruction  purposes.  And  such 
a  calculation  does  not  take  into  account  our  changed 
position  from  a  debtor  to  a  creditor  nation,  which  has 
set  free  funds  for  foreign  investment  which  formerly 
went  to  pay  foreign  charges  for  interest  and  services. 

The  expenditure  during  the  past  year  in  this  country 
of  enormous  sums  for  oil  speculation,  for  pleasure  auto- 
mobiles, and  for  otjier  extravagances,  is  sufficient  evi- 
dence that  a  surplus  over  real  needs  exists. 

Granting  that  funds  exist  in  the  United  States  that 
337 


WAR  COSTS  AND  THEIR  FINANCING 

may  be  loaned  to  Europe,  the  further  question  arises 
as  to  how  these  funds  are  to  be  made  available  for  this 
purpose.  By  what  machinery  or  methods  is  this  capital 
to  be  collected  and  placed  at  the  disposition  of  European 
borrowers?  During  the  period  when  the  United  States 
was  in  the  war,  this  question  was  solved  by  the  Govern- 
ment's itself  loaning  money  to  the  Allies  and  accepting 
therefor  their  promises  to  pay.  The  $10,000,000,000 
appropriated  for  this  purpose,  however,  is  now  ex- 
hausted, and  Congress  has  expressed  an  unwillingness 
to  continue  this  method.  It  is  clear  that  an  end  has 
come  to  direct  loans  by  the  United  States  Government. 
Indirectly,  however,  there  remained  authority  for  the 
issue  by  the  War  Finance  Corporation  of  bonds  to  the 
amount  of  $1,000,000,000.  This  fund  was  to  be  loaned 
to  exporters  or  to  banks  and  other  institutions  that 
finance  exporters  for  the  purpose  of  promoting  Ameri- 
can trade.  The  War  Finance  Corporation,  however, 
made  little  use  of  the  authority  granted  it  and  down  to 
j\Iay  10,  1920,  when  further  advances  were  suspended  at 
the  request  of  the  Secretary  of  the  Treasury,  it  had 
loaned  only  about  $31,000,000.* 

Private  sources  and  not  the  Government,  it  is  evident, 
must  furnish  the  requisite  capital  for  the  reconstruction 
of  Europe.  On  this  point  the  conclusions  of  Herbert 
C.  Hoover,  based  upon  a  thorough  study  of  the  needs 
of  Europe,  are  of  great  weight  :^ 

In  my  personal  view  the  largest  part  of  the  credits  required 
from  the  United  States  should  be  provided  by  private  credits 
and  we  should,  except  for  certain  limited  purposes,  stop  the 

lending  of  the  money  of  our  Government.     Credits  next  year 

, 

*  Press  despatches  of  May  11,  1920. 

'  Associated  Press  despatch  from  Paris,  in  Washington  Post, 
June  10,   1919. 

338 


FINANCING  EUROPE  AFTER  THE  WAR 

are  required  for  business  operation,  and  when  Governments 
are   engaged   in    business,    they   always   oversi^read    and   the 

years  to  come  must  be  years  of  economy The 

credit  of  private  individuals  and  firms  of  even  the  most  wrecked 
states  of  Europe  is  still  worth  something,  and  what  is  needed 
is  to  reestablish  confidence  in  such  credits. 

If  we  undertake  to  give  credits  we  should  undertake  it  in 
a  definite,  organized  manner.  We  should  have  consolidated, 
organized  control  of  the  assistance  we  give,  in  such  a  way 
that  it  should  be  used  only  if  economy  in  imports  is  main- 
tained and  if  the  definite  rehabilitation  of  industry  is  under- 
taken —  if  the  people  return  to  work,  if  orderly  government 
is  preserved,  if  fighting  is  stopped,  disarmament  is  under- 
takea  and  there  is  no  discrimination  against  the  United 
States  in  favor  of  other  countries. 

If  these  things  are  not  done,  Europe  will  starve  in  spite 
of  all  we  can  do.  The  suri^lus  of  our  productivity  could  not 
support  a  Europe  of  to-day's  idleness,  if  every  man  of  us 
worked  15  hours  daily. 

It  is  one  thing  to  say  that  capital  must  be  loaned 
to  Europe  and  that  it  must  be  done  by  private  initiative ; 
it  is  quite  another  thing  to  work  out  the  machinery  by 
vv^hich  credit  may  safely  be  extended.  The  problem  is 
complicated  because  the  amount  of  capital  available  for 
investment  purposes  is  inadequate  to  meet  the  enormous 
demands  which  are  being  made  and  which  in  all  proba- 
bility will  continue  to  be  made  for  the  next  three  to 
five  years.  It  has  been  suggested  that  some  sort  of 
rationing  principle  may  have  to  be  applied,  and  that 
if  the  work  of  reconstruction  in  the  belligerent  countries 
is  to  be  advanced,  credit  and  raw  materials  may  have  to 
be  apportioned  to  them  in  accordance  with  their  needs, 
rather  than  in  strict  accord  with  the  security  that  can 
be  offered.^    In  the  devastated  areas  of  Europe  industry 

'NeiD  York  Times,  June  16.  1010;  F.  A.  Vanderlip,  What  Hap- 
pened to  Europe,  p.  184, 

339 


WAR  COSTS  AND  THEIR  FINANCING 

is  prostrate,  and  credit  is  insecure.  The  people  in  gen- 
eral are  unable  to  pay  for  supplies,  either  with  goods 
or  with  gold,  and  accordingly  they  must  be  permitted 
to  pay  with  the  only  thing  that  they  can  offer,  namely, 
their  promises.  Their  position  is  like  that  of  an  insolvent 
debtor  whose  creditors  advance  him  new  loans  in  order 
that  he  may  rehabilitate  himself,  or  like  that  of  a  bank- 
rupt corporation  that  is  temporarily  financed  by  means 
of  recei^'ers'  certificates. 

Such  a  method  of  relief  is  obviously  Only  of  temporary 
value.  The  peoples  of  Europe  alone  can  save  themselves 
by  their  own  industry,  bui  they  must  be  furnished  with 
the  raw  materials  and  tools  with  which  to  work,  and  in 
some  cases  even  with  the  food  to  support  them  until  the 
first  products  of  their  toil  are  harvested.  It  is  necessary 
to  reestablish  the  industrial  cycle  as  promptly  as  pos- 
sible. The  present  situation  is  an  emergency  one,  but 
the  period  of  the  emergency  may  easily  run  to  two  or 
three  years.  For  handling  such  a  problem,  Government 
machinery  is  too  slow,  too  rigid,  too  much  influenced  by 
political  considerations,  and  too  lavish.  Many  plans  have 
been  formulated  in  Europe  calling  for  large  expendi- 
tures for  public  works,  frequently  for  unproductive  and 
extravagant  undertakings,  for  which  there  is  strong 
pressure  on  the  ground  that  they  are  needed  to  give 
employment.  But  as  the  amount  of  capital  is  limited, 
it  must  be  granted  with  care,  and  all  requests  for  loans 
must  be  carefully  scrutinized,  and  if  improper  firmly 
rejected. 

The  demands  for  loans  range  from  short-term  accom- 
modation to  long-time  credits  running  into  permanent 
investments.  For  the  purchase  of  food  and  of  other 
consumable  commodities  cash  payments  or  short  credits 
will  usually  be  demanded.    For  productive  capital,  such 

340 


FINANCING  EUROPE  AFTER  THE  WAR 

as  agricultural  and  industrial  machinery,  which  is  useJ 
for  further  production  and  will  normally  provide  the 
means  of  payment,  longer  credits  are  necessary,  which 
may  run  from  a  year  to  18  months.  And  finally,  loans 
for  the  purpose  of  rebuilding  plants  which  have  been 
destroyed  or  of  constructing  new  ones  may  be  regarded 
as  a  permanent  investment  of  capital.  It  is  obvious 
that  the  machinery  to  care  for  these  different  forms  of 
credit  will  be  very  diverse. 

Some  of  the  devices  that  have  been  suggested  for 
meeting  the  problems  involved  in  short  term  credit  may 
be  briefly  stated.  Early  in  1919  a  group  of  American 
bankers  arranged  to  grant  an  acceptance  credit  for 
Belgium  banking  institutions  of  $50,000,000  for  the 
purchase  of  commodities  in  the  United  States,  and  a 
group  of  British  banks  and  acceptance  houses  likewise 
arranged  a  credit  for  purchases  in  Europe  to  the  amount 
of  $20,000,000,  in  three-months  bills  renewable  three 
times,  making  a  total  period  for  the  bills  of  12  months.'^ 
Industrial  credits  have  also  been  arranged  with  Ger- 
many, France,  and  Italy,  and  similar  arrangements  will 
continue  until  those  countries  rehabilitate  their  indus- 
tries and  reduce  their  adverse  trade  balances.®  The 
continued  exports  to  those  countries  from  the  United 
States,  far  in  excess  of  the  imports,  evidence  the 
extent  to  which  such  credit  is  being  utilized. 

A  suggestion  put  forward  by  Henry  P.  Davison,  of 
the  firm  of  J.  P.  Morgan  &  Company,  is  that  of 
coordinating  the  resources  of  the  entire  banking  and 
industrial  community,  both  in  this  country  and  abroad, 
rather  than  of  the  extension  of  individual  credits  by 
particular  institutions.     Credits  would  be  established  in 

''Times    (Lonrlon)   Trade  Rupplement.  May  17,  1919. 
^Xew  York  Times,  June  8,  1919. 

341 


WAR  COSTS  AND  THEIR  FINANCING 

Europe  secured  by  everything  given  against  the  ship- 
ment and  further  secured  by  the  guarantee  of  the  Gov- 
ernment. Against  these,  debentures  would  be  issued 
by  the  banking  group  in  this  country  and  distributed  as 
widely  as  possible  among  the  investing  public.^ 

Another  plan  is  the  formation  of  group  export 
corporations  to  handle  the  foreign  sales  of  single  com- 
modities like  cotton,  copper,  steel,  tobacco,  and  other 
American  products.  Such  group  corporation  would 
have  the  backing  of  a  central  securities  corporation 
which  would  sell  its  debentures  to  the  investing 
public.  An  attempt  was  made  to  organize  the 
International  Cotton  Corporation  along  these  lines 
but  it  was  abandoned  because  of  lack  of  support. 
The  formation  of  discount  houses  has  also  been 
suggested,  which  would  be  organized  for  the  purpose 
of  dealing  in  foreign  acceptances;  such  a  company  has 
been  incorporated  under  the  laws  of  New  York  State, 
to  be  known  as  the  Foreign  Trade  Corporation. ^° 

Still  another  method  which  aims  at  the  facilitating  of 
grants  of  credit  by  x\merican  producers  and  manufac- 
turers who  are  without  experience  or  established  con- 
nections in  foreign  trade  is  the  establishment  of  credit 
insurance.  Companies  organized  for  this  purpose  would, 
for  a  moderate  charge,  insure  the  exporter  against  loss 
due  to  the  insolvency  of  the  drawee  of  the  bill.  Such 
companies  have  already  been  organized  in  London,  New 
York,  and  Chicago."  Similarly,  the  National  Associa- 
tion of  Credit  Men  has  organized  a  foreign-credit  inter- 
change bureau,  the  object  being  a  reciprocal  exchange 
of  knowledge  and  experiences  in  foreign  trade.     The 

*  2Ww  York  Times.  June  14,  1919. 
^"Xcw  York  Times,  August  15,  1919. 
"Tfte  Americas,  May,   l919,  p.  21. 

•  342 


FINANCING  EUROPE  AFTER  THE  WAR 

plan  is  based  on  the  domestic  interchange  system  which 
has  worked  so  well  in  this  country.^-  Finally,  legisla- 
tion has  been  passed  by  Congress  granting  permission 
to  national  banks  until  1921  to  invest  not  more  than 
five  per  cent,  of  their  capital  and  surplus  in  corporations 
organized  to  finance  foreign  trade.^" 

I\Iany  of  the  demands  for  credit  on  the  part  of  Europe, 
however,  will  not  be  for  short  time  accommodation,  but 
will  consist  rather  of  long  ei*edits  and  even  of  permanent 
investments.  To  meet  this  need  several  other  methods 
have  been  suggested.  A  thorough-going  scheme  has  been 
outlined  by  Mr.  Vanderlip^*  in  the  form  of  an  interna- 
tional loan  between  a  group  of  lending  nations  on  the 
one  hand  and  of  borrowing  nations  on  the  other.  Credits 
would  be  allocated  and  would  be  secured  by  first  liens 
on  the  customs  revenues;  the  bonds  would  be  floated  in 
the  loaning  countries.  The  bonds  might  run  for,  say, 
35  years,  but  could  be  liquidated  in  advance  if  desired. 
The  obstacles  to  this  plan,  however,  are  probably 
insurmountable. 

For  the  long  term  demand  good  results  may  be 
obtained  by  the  investment-trust  method.  These  invest- 
ment trusts  work  on  the  insurance-company  plan,  select- 
ing securities  from  all  parts  of  the  world  and  thus 
spreading  the  risks  by  the  diversification  of  their 
holdings.  Successful  organizations  of  this  kind  exist  in 
England,  Scotland,  France,  Belgium,  Switzerland,  and, 
in  fact,  in  all  the  creditor  nations.^^  Such  a  method 
seems  to  lend  itself  peculiarly  well  to  the  present  situa- 
tion between  the  United  States  and  Europe.  A  longer 
step  in  the  direction  of  permanent  investment  in  Euro- 

"  Journal   of   Commerce.   July   5,    1919. 

"Act  of  September  17,  1919." 

^*0p.   cit.,  p.    183. 

^^  Journal  of  Commerce,  April   16,   1919. 

343 


WAR  COSTS  AND  THEIR  FINANCING 

pean  countries  is  the  investment  of  American  capital  in 
foreign  manufacturing,  mining,  and  lumbering  prop- 
erties. In  view  of  the  strong  nationalistic  tendencies 
and  the  heavy  taxation  now  evident  in  Europe,  however, 
it  is  doubtful  how  far  such  an  invasion  of  American 
capital  would  be  successful. 

The  latest  plan  suggested  is  contained  in  the  Edge 
act  approved  by  the  President  December  24,  1919.^*^  The 
purpose  of  this  measure  is  to  promote  American  export 
trade  by  providing  a  method  for  foreign  purchasers  to 
obtain  goods  on  credit  backed  by  collateral,  but  at  the 
same  time  provide  cash  for  the  American  exporters. 
Private  corporations  for  international  banking  or 
financial  operations  with  a  capital  of  not  less  than 
$2,000,000  are  authorized,  subject  to  the  control  of  the 
Federal  Reserve  Board.  These  have  power  to  deal  in 
all  foreign  exchange  operations  and  to  issue  debentures 
to  ten  times  the  amount  of  their  capital  and  surplus. 
Branches  may  be  established  in  foreign  countries,  and 
combinations  are  permitted  in  the  United  States  which 
would  ordinarily  be  forbidden  under  the  anti-trust 
laws.  Under  the  Federal  Reserve  Act  national  banks 
are  not  allowed  to  rediscount  long  term  paper,  but  the 
Edge  corporations  will  be  permitted  to  accept  foreign 
securities  in  lieu  of  cash  and  then  obtain  ready  money 
by  the  sale  of  their  debentures  to  American  investors, 
or  they  may  use  such  securities  as  collateral  for  loans. 
Such  a  corporation  would  correspond  to  the  investment 
trust  as  this  has  been  developed  in  Great  Britain  and 
various  European  countries.  Thus  far  only  one  corpo- 
ration has  been  organized  under  the  Edge  act. 

An  ambitious  and  far-reaching  scheme  was  proposed 
by  Senator  Owen,  who  drew  up  a  bill  to  create  a  power- 

"S.  2472,  66th  Congress,  1st  Session. 

344 


FINANCING  EUROPE  AFTER  THE  WAR 

ful  Foreign  Finance  Corporation  to  operate  under 
Government  supervision.^'  The  capital  would  be  sub- 
scribed by  the  Government,  by  the  national  banks,  and 
by  the  public,  and  the  Corporation  would  be  chartered 
to  engage  in  the  business  of  stabilizing  foreign  exchange 
and  extending  long-time  credits  to  foreign  nations.  The 
Corporation  would  have  authority  to  sell  its  bonds, 
secured  by  foreign  bonds  or  other  securities.  Little, 
however,  has  been  heard  of  this  plan  since  its  proposal ; 
indeed,  it  may  be  said  that  this,  like  many  of  the  other 
suggestions  put  forward,  has  served  its  most  useful 
purpose  in  provoking  discussion,  and  leading  to  a  more 
careful  study  of  the  situation.  Conditions  have  changed 
so  rapidly  that  plans  have  necessarily  been  altered  to 
meet  the  changes  in  the  situation,  and  it  is  even  yet  too 
soon  to  say  what  the  final  outcome  will  be.  The  only 
thing  certain  in  the  discussion  is  the  need  of  Europe 
and  the  certainty  that  some  practicable  method  will 
finally  be  devised  for  advancing  the  necessary  funds. 
That  a  large  movement  of  American  capital  to  Europe 
is  actually  taking  place  is  evidenced  by  the  estimate  of 
Werner  Wintermantel,  Director  of  the  American 
Department  of  the  Deutsche  Bank  in  Berlin,  that  since 
the  Treaty  of  Versailles  rather  more  than  15,000,000,000 
marks  of  American  capital  had  been  invested  in 
Germany.^® 

Another  phase  of  the  situation  which  must  be  taken 
into  account  is  the  need  of  educating  the  American 
investor  to  buy  foreign  securities.  Until  the  w^ar  the 
American  investor  knew  little  of  and  cared  less  for 
foreign  investments.  Domestic  issues  offered,  on  the 
whole,  larger  returns  and  had  the  advantage  of  being 

"A'^ew  Yorh  F^nn.  May  28,  1919. 
^^New  York  Times,  July  9,  1920. 

345 


WAR  COSTS  AND  THEIR  FINANCING 

familiar  and  put  out  by  domestic  corporations  or  govern- 
mental bodies.  Except  for  some  Japanese  and  Canadian 
Government  bonds  and  Mexican  and  Argentine  railway 
bonds,  there  were  few  holdings  of  foreign  securities 
in  this  country.  ]\Iuch  was  done  during  the  war  toward 
interesting  American  investors  in  foreign  government 
securities,  and  the  present  listing  of  Canadian,  French, 
and  British  Government  and  French  municipal  bonds 
shows  the  esteem  in  which  they  are  held.  The  total 
amount  of  private  investment  in  the  securities  of  foreign 
Governments  during  the  first  three  years  of  the  war 
amounted  to  about  $3,000,000,000.  If  the  program  is 
carried  out  of  having  the  sums  needed  for  the  recon- 
struction of  Europe  supplied  by  private  initiative  in 
the  United  States,  it  will  be  necessary  for  something  like 
this  sum  or  an  even  greater  amount  to  be  advanced 
again  in  a  similar  period.  To  market  foreign  securities, 
however  well  secured,  on  such  a  scale  as  this  will  require 
a  campaign  of  education.  It  will  also  call  for  the  con- 
tinued exercise  of  thrift  and  saving,  for  such  sums 
cannot  be  subtracted  from  the  amount  at  present 
annually  invested  in  American  productive  industry: 
it  must  be  provided  out  of  the  savings  of  the  people. 

Such  a  campaign  to  promote  a  larger  investment  in 
foreign  securities  is  justifiable.  The  idea  that  the  long- 
term  paper  representing  European  loans  shall  be  taken 
out  of  the  portfolios  of  the  banks  and  placed  in  the 
strong  boxes  of  investors  is  a  sound  one.  If  this  can 
be  done,  further  inflation  will  be  avoided  and  real 
savings  effected.  From  this  standpoint  a  series  of  issues 
distributed  as  widely  as  possible  throughout  the  country 
is  greatly  to  be  preferred  to  a  single  great  operation 
which  is  likely  to  lead  to  financial  congestion. 

A  beginning  in  this  direction  has  already  been  made 
346 


FINANCING  EUROPE  AFTER  THE  WAR 

by  the  recent  flotation  of  a  Belgium  7^  per  cent. 
25  year  loan  for  $50,000,000,  and  of  a  Swiss  8  per  cent. 
20  year  loan  for  $25,000,000.  Both  of  these  were  sub- 
scribed at  once  by  investors. 

If  the  investment  habits  of  the  American  people  are 
to  be  altered  and  they  are  to  be  persuaded  to  invest  in 
foreign  securities,  there  must  be  no  question  as  to  the 
soundness  of  these  securities.  Failure  in  such  a  pro- 
gram, or  even  serious  mistakes,  might  jeopardize  the 
whole  movement.  The  securities  offered  must  be  unques- 
tionably good  as  to  safety,  interest  rate,  conditions  of 
repayment,  and  other  terms.  It  has  been  suggested  that 
the  loans  made  might  be  secured  by  a  first  lien  on  the 
revenues  of  the  borrowing  countries  ;^^  but  such  a  pro- 
posal, although  it  might  add  to  the  security  of  the  bond, 
can  scarcely  be  entertained  as  a  practicable  method. 
Although  investors  may  be  appealed  to  on  broad-minded 
grounds  to  aid  in  the  work  of  reconstruction  in  Europe 
by  lending  their  savings,  such  loans  should  be  for  con- 
structive purposes  and  must  be  adequately  secured. 
Capital  cannot  be  withdrawn  from  domestic  investment 
beyond  a  certain  point  without  impairing  our  own  ability 
to  render  further  assistance.  The  development  of 
American  industries  must  be  maintained  and  expanded 
eoincidently  Avith  the  restoration  of  European  enterprise. 

In  conclusion,  certain  principles  wiiieh  emerge  from 
the  foregoing  discussion  may  be  briefly  stated. 

1.  The  European  situation  must  be  treated  as  a  whole, 
for  economic  breakdown  at  any  one  point  would 
inevitably  have  a  disastrous  effect  upon  the  rest  of  the 
world.     This  means  the  absence  of  discrimination. 

2.  Every  effort  must  be  made  to  avoid  further  infla- 

"  F.  A.  Vanderlip,  op.  cit.,  p.  185. 

347 


WAR  COSTS  AND  THEIR  FINANCING 

tion.  If  long  term  securities  are  used  as  the  basis  of 
future  financing,  these  must  be  got  as  quickly  as  possible 
into  the  hands  of  permanent  investors.  It  is  highly 
undesirable  to  throw  additional  burdens  upon  the  banks 
in  the  way  of  long  time  investments. 

3.  The  best  method  of  handling  the  credit  situation 
is  probably  by  having  group  credits  arranged  by  finan- 
cial, commercial,  and  industrial  interests  in  a  certain 
region,  or  by  a  single  industry  for  a  wider  district.  Such 
credits  could  then  be  granted  by  groups  of,  say,  Ameri- 
can bankers  Avho  stand  in  ciose  touch  with  the  producers 
and  exporters  of  the  commodities  to  be  purchased  with 
these  credits. 

4.  Short  term  credits  on  the  whole  are  preferable  to 
long  term  bonds,  for  every  effort  must  be  made  to 
restore  business  to  a  normal  basis  as  promptly  as 
possible. 

5.  When  this  time  arrives  larger  imports  must  be 
expected,  and  ultimately  our  so-called  "  favorable  " 
balance  of  trade  will  be  reversed  and  an  excess  of 
imports  over  exports  become  a  normal  phenomenon. 
This  is  the  inevitable  result  of  our  present  position  as 
a  creditor  nation  and  may  be  expected  to  persist  unless 
we  continue  to  invest  the  balances  due  us  in  additional 
foreign  securities  or  in  permanent  investments  abroad. 
This,  however,  would  only  postpone  the  change  and 
make  it  more  far-reaching  in  the  end.  For  the  immedi- 
ate future  it  is  the  duty,  as  it  is  the  interest,  of  the 
people  of  the  United  States  to  loan  their  available 
savings  to  aid  in  the  reconstruction  of  Europe  and  to 
accept  pay  in  the  promises  of  that  war-swept  continent. 

Wliile  these  and  other  plans  for  a  broad  scheme  of 
economic  reconstruction   and  financial   assistance   have 

348 


FINANCING  EUROPE  AFTER  THE  WAR 

been  under  consideration,  the  actual  movement  of  goods 
has  not  been  delayed.  There  has  been  much  individual 
effort  on  the  part  of  single  branches  of  trade  and 
industry,  even  though  coordination  on  a  national  scale 
is  as  yet  lacking.  This  is  clearly  shown  in  the  volume 
of  exports,  the  monthly  totals  of  which  show  an  increase, 
intermittent  but  real.  Although  part  of  this  increase  is 
due  to  advancing  prices,  there  is  still,  after  deduction 
for  this  factor,  a  remarkable  growth.  The  following 
table  gives  the  merchandise  imports  and  exports  of  the 
United  States  by  months  for  the  year  1919 : 


United  States  Imports  aistd  Exports  of  Merchandise,  by 
Months,  1919 


Imports 

Exports 

Excess  exTDorts 
over  imports 

January 

February 

March 

April 

$212,992,644 
235,124,274 
267,596,289 
272,956,949 
328,924,393 
293,069,779 
343,746,070 
307,293,078 
435,448,747 
401,845,150 
424,824,073 
380,710,323 

$622,552,783 
585,097,012 
603,141,648 
714,500,137 
606,379,599 
918,212,671 
568,687,515 
646.054,425 
595,214,266 
631,618,449 
740,033,585 
681,649,999 

$409,560,139 
349,972,738 
335,545,359 
441,543,188 

May 

277,455,206 

June 

625,142,892 

July 

224  941 ,445 

August 

September 

October 

November 

December 

338,761,347 
159,765,519 
229,773,299 
315,209,512 
300,939,676 

Total 

$3,904,378,733 

$7,921,196,047 

$4,016,818,314 

The  larger  part  of  these  exports  and  the  group  which 
shows  the  most  marked  increase,  consists  of  foodstuffs 
and  raw  materials.  The  need  in  Europe  for  these  sup- 
plies is  so  desperate  and  so  immediate  that  they  must 

349 


WAR  COSTS  AND  THEIR  FINANCING 

be  had  on  almost  any  terms.  Whether  our  exports  will 
continue  on  the  same  high  level  after  the  most  urgent 
demands  are  satisfied  is  a  question  open  to  much  doubt. 
The  adverse  exchange  situation  raises  the  cost  of  Ameri- 
can exports  to  most  European  countries  and  to  that 
extent  reduces  their  willingness  to  purchase  our  goods. 
Moreover,  because  of  tlieir  enormous  indebtedness  to  the 
United  States,  incurred  during  the  war,  they  are  un- 
willing to  add  to  that  burden.  Import  restrictions  have 
been  imposed,  an  apparent  indisposition  to  arrange 
credits  and  make  known  their  needs  has  been  mani- 
fested,^" and  a  low  exchange  rate  has  apparently  been 
regarded  with  favor  as  tending  to  limit  foreign  pur- 
chases. It  is  too  soon  to  speak  with  certainty  as  to  the 
future,  but  it  must  not  be  forgotten  that  in  international, 
as  in  domestic,  commerce  the  purchaser,  in  the  final 
analysis,  determines  the  volume  and  character  of  the 
trade. 

^*  0/.  statement  of  F.  I.  Kent,  director  of  the  War  Finance 
Corporation,  in  an  interview  after  his  return  from  Europe,  Islew 
York  Times,  July  19,  1919. 


CHAPTER  XII 

AFTER-WAR  PROBLEMS  OF   CURRENCY   AND  DEBT 

Inflation  of  the  currency  a  world  phenomenon  —  Its  eflect  on 
prices  —  Why  should  inflation  have  been  permitted?  —  Th.e 
remedy  for  inllation  —  Difficulties  —  The  distribution  of 
gold — Financial  situation  of  the  principal  countries  —  Com- 
parison of  wealth  and  debt  —  Can  the  burdens  be  carried?  — 
American  and  Eluropean  theories  as  to  debt  payment  — 
Problem  of  funding  the  floating  debts  —  The  capital  levy  — 
Problem  of   refunding  —  Will   the  debts  be  paid? 

One  of  the  most  urgent  problems  left  by  the  war  is 
the  reduction  of  the  enormous  inflation  now  existing  iu 
money  and  credit  throughout  the  world.  With  an  all 
l)ut  universal  suspension  of  specie  payment,  the  expan- 
sion of  currency  issues  and  of  banking  credits  went  on 
practically  unchecked  throughout  the  war.  The  result 
is  that  to-day  the  note  and  deposit  liabilities  of  the 
European  banks  are  altogther  out  of  proportion  to  the 
metallic  reserves  upon  which  they  are  supposed  to  rest. 
The  same  is  true  also  of  the  smaller  amounts  of  direct 
Government  issues.  This  expansion  in  the  volume  of 
currency  was  caused  by  the  urgent  needs  of  the 
Governments  during  the  war,  which  forced  them 
to  rely  upon  advances  from  the  central  note-issuing 
institutions.  In  ordinary  commercial  transactions  an 
issue  of  bank  notes  or  the  creation  of  a  credit  deposit 
is  based  upon  commercial  paper,  and  the  expansion 
of  the  means  of  payment  is  limited  by  the  amount  of 
legitimate  business  requiring  to  be  financed.  During 
the  war,  however,  no  such  checks  were  placed  upon 
inflation.     The  only  limit  was  the  need  of  the  Govern- 

351 


WAR  COSTS  AND  THEIR  FINANCING 


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352 


PROBLEMS  OF  CURRENCY  AND  DEBT 


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353 


WAR  COSTS  AND  THEIR  FINANCING 

ment,  and  issues  were  made  in  response  to  the  demands, 
not  of  commerce,  but  of  war's  necessity.  The  problem 
that  now  presents  itself  is  that  of  the  deflation  of  the 
paper  money  in  circulation  and  the  restoration  of 
the  gold  standard,  if  this  is  possible. 

The  changes  that  took  place  in  the  gold  reserves  and 
note  circulation  of  the  central  banking  institutions  of 
the  leading  European  countries  and  of  the  United  States 
during  the  war  are  shown  in  the  accompanying  table. 
Not  all  of  the  increases  in  the  note  issues  can  be  counted 
as  net  additions  to  the  media  of  exchange,  for  a  certain 
proportion  simply  took  the  place  of  gold  and  silver 
which  formerly  circulated  as  coins  but  which  have  now 
entirely  disappeared  from  circulation.  On  the  other 
hand  this  table  does  not  show  the  direct  issues  of  paper 
money  by  the  Governments,  such  as  were  made  in  Italy, 
Germany,  and  other  countries.  It  has  been  estimated 
that  this  increase  of  nearly  30,000,000,000  dollars  in  the 
money  of  the  world  is  more  than  the  value  of  all  the 
gold  and  silver  produced  by  all  the  mines  of  the  world 
since  the  discovery  of  the  New  World. 

The  inflation  which  began  during  the  war  unfortu- 
nately continued  after  its  cessation  at  an  accelerated 
rate.  It  was  impossible  for  the  belligerent  countries 
suddenly  to  reduce  their  expenditures  or  to  increase 
their  revenues  and  they  continued  to  resort  to  loans  and 
the  issue  of  paper  money  in  order  to  meet  the  deficits. 
In  the  thirteen  months  between  the  Armistice  and  the 
end  of  1919  it  is  estimated  that  the  paper  money  in  cir- 
culation in  the  principal  countries  of  the  world  increased 
about  35  per  cent.^  The  table  on  pages  352  and  353  shows 
the  gold  reserves  and  note  circulation  in  1914  and  1918. 

^  See  tahle  compiled  by  0.  P.  Austin  in  The  Americas,  January, 
1920,  p.  27. 

354 


PROBLEMS  OF  CURRENCY  AND  DEBT 

In  addition  to  note  issues  there  was  a  considi'rable 
increase  in  the  credit  currency  of  the  world  in  the  form 
of  bank  deposits,  which  are  a  more  volatile  and  inliation- 
ary  form  of  currency  than  circulating  notes.  There  was, 
moreover,  a  considerable  increase  in  the  use  of  checks 
during  the  war  in  such  countries  as  France  and  Ger- 
many, where  formerly  little  resort  was  had  to  deposit 
banking.  The  following  table  shows  the  bank  deposits 
of  the  principal  countries  at  tlie  l)eginning  and  the  end 
of  the  war: 


Bank  Depostis 
{In  thousands) 


1913 


1918 


Great  Britain 

France 

United  States 

Canada 

Italy 

Japan 

Argentina.  .  . 

Spain 

Switzerland. . 

Sweden 

Germany. .  .  . 


$5,521,645 

1,327,770 

10,503,695 

1,166,180 

407,135 

926,880 

684,190 

262,245 

397,585 

402,905 

2,715,785 


$24,316,015 


$11,250,000 

2,172,875 

■30,000,000 

2,085,060 

1,795,080 

•2,600,000 

1,207,135 

1516,000 

«  955 , 000 

953 , 770 

19,913,000 


$63,447,920 


Increase— $39,131,905,  or  162  per  cent. 


Without  going  into  the  vexed  ciuestion  as  to  what 
constitutes  inflation,  this  statistical  presentation  of  the 
facts  would  seem  to  indicate  that  inflation  has  taken 
place  as  a  world  movement  by  reason  of  the  enormous 

'  Estimates  based  on  exact  figures  so  far  as  availalile  and  sup- 
plemented by  estimates  based  on  1917  figures  where  those  for 
1918   are  lacking. 

355 


WAR  COSTS  AND  THEIR  FINANCING 

addition  to  the  circulating  media  of  the  belligerent  and 
even  of  the  neutral  countries.  If  inflation  be  defined 
as  a  more  rapid  increase  in  the  means  of  payment  tlian 
in  the  volume  of  business,  there  seems  to  be  little  doubt 
that  it  has  occurred  on  such  a  scale  as  to  have  affected 
all  price  relations  in  every  country  of  the  globe,  no 
matter  how  remote  from  the  war.  Inflation  has  resulted, 
not  because  the  ratio  between  gold  and  credits  has  been 
changed,  for  the  gold  base  is  probably  still  sufficient  in 
most  countries  to  maintain  the  redeemability  of  the 
credits  based  upon  it,  but  because  the  ratio  between 
money  and  purchasable  commodities  has  been  distorted. 
It  is  impossible  to  trace  the  exact  effects  of  this 
increase  in  money  upon  prices,  and  it  is  equally  impossi- 
ble to  tell  what  part  was  played  in  the  general  rise  of 
prices  throughout  the  world  by  ;;his  factor  and  to  what 
extent  this  was  due  to  other  price-raising  factors  at 
work,  such  as  government  loans,  scarcity  of  commodities, 
etc.  In  the  report  of  the  Committee  on  War  Finance  of 
the  American  Economic  Association^  a  very  careful 
analysis  of  the  various  factors  entering  into  the  situation 
in  the  United  States  was  made,  the  chief  findings  of 
which  are  here  summarized.  The  growth  of  business, 
which  may  be  said  to  constitute  the  demand  for  money, 
increased  about  13  per  cent,  between  1913  and  1918. 
On  the  other  hand,  the  supply  of  money  in  the  form 
of  actual  money  in  circulation  increased  60  per  cent,  and 
the  bank  deposits  94  per  cent,  in  the  same  period.  In 
other  words,  the  means  of  payment  increased  more 
rapidly  than  the  business  transactions  for  the  conduct 
of  which  they  were  needed.  The  result  would  normally 
be  an  increase  of  prices  and  this  is  shown  actually  to 

-  Published   as   Supplement   No.   2    of  the   American  Economic 
Review,  March,  1910. 

356 


PROBLEMS  OF  CURRENCY  AND  DEBT 


have  taken  place.  Wholesale  prices  increased  90  per 
cent,  and  wages  69  per  ceiit.  The  following  table  shows 
the  essential  facts  in  tabular  form  :^ 

Movements  op  Money,  Prices  and  Wages  in  the  United  States, 
1913-1918 


Year 

Growth 

of 
business 

Monetary 
circula- 
tion 

Growth 
of  bank 
deposits 

Whole- 
sale 
prices 

WAOES 

N.  Y. 
state 

Union 
scale 

1913 
1914 
1915 
1916 
1917 
1918 

100 
99 
103 
107 
112 
113 

100 
103 
109 
123 
145 
160 

100 
103 
114 
141 
168 
(194) 

100 
99 
100 
123 
175 
196 

100 
103 
115 
131 
169 

100 
102 
103 
107 
114 

It  would  be  going  too  far  to  say  that  monetary  changes 
alone  have  brought  about  the  great  rise  in  prices.  The 
curtailment  in  the  supply  of  commodities,  the  difficulty 
and  cost  of  shipment,  and  the  changes  in  demand  have 
all  been  so  great  that  their  combined  influence  has  prob- 
ably been  greater  than  that  of  changes  in  the  supply  of 
money.  The  number  of  nations  at  war  and  the  extent 
to  which  they  mobilized  their  economic  resources  for 
military  purposes  enormously  intensified  the  demand  for 
articles  needed  in  the  prosecution  of  the  war,  while,  on 
the  other  hand,  articles  not  so  needed  were  designated 
as  non-essentials  and  often  ruthlessly  suppressed.  The 
general  and  continued  demand  on  tlie  part  of  so  many 

^ Ihid.,  pp.  94,  107.  Explanation  and  limitations  as  to  the 
manner  in  which  these  figures  were  obtained  are  given  in  the 
report,  to  which  the  reader  is  referred.  The  statistics  are 
reproduced  here  without  these  notes  simply  to  present  a  picture, 
believed  to  be  whollv  accurate,  of  the  changes  which  have  taken 
place  in  the  circulating  media,  prices,  and  wages. 

357 


WAR  COSTS  AND  THEIR  FINANCING 

countries  for  articles  needed  in  the  war  immediately  drove 
up  the  prices  of  those  articles,  while  the  mobilization  of 
vast  armies,  the  expansion  of  governmental  functions, 
and  the  general  disorganization  of  credit  all  combined  to 
create  a  demand  for  more  money.  But  in  many  cases 
the  issues  were  made,  as  has  been  indicated,  without 
reference  to  purely  monetary  needs,  and  indeed  far 
exceeded  these.  This  brought  about  a  further  rise  in 
prices,  and  so  the  vicious,  never-ending  circle  was 
introduced. 

If  responsibility  for  this  world-wide  phenomenon  could 
be  fixed,  it  would  undoubtedly  be  found  that  the  impetus 
toward  higher  prices  came  from  Europe.  The  rise  in 
prices  occurred  in  England  and  France  before  it  did  in 
the  United  States.  So  far  as  nrices  rose  in  the  United 
States  in  1915  and  1916,  the  increase  was  principally 
due  to  the  European  demand  for  our  commodities. 
After  that,  the  addition  to  our  circulating  medium  and 
bank  reserves  of  a  steady  stream  of  gold  and  later  our 
own  currency  and  credit  expansion  combined  to  con- 
tribute to  this  end.  It  was  a  movement  which  could  not 
be  isolated,  and  by  the  end  of  the  war  no  country, 
however  remote  from  the  seat  of  the  conflict,  had  been 
able  to  escape  the  general  upward  movement  of  prices. 
Owing  to  the  existence  of  enormous  issues  of  fiduciary 
money,  much  of  which  will  probably  remain  for  years 
as  inconvertible  paper  money,  it  is  probably  safe  to  say 
that  the  world  has  entered  upon  a  higher  level  of  prices 
which  will  endure  for  at  least  a  generation. 

It  will  be  impracticable  here  to  trace  in  detail  the  evil 
effects  of  inflation.  The  most  obvious  one,  and  that  of 
the  most  far-reaching  consequence,  has  been  the  rise  in 
the  prices  of  commodities,  but  this  has  already  been 
sufficiently  described.     As  is  usual  in  situations  of  this 

358 


PROBLEMS  OF   CURRENCY  AND  DEBT 

sort,  wagvs  did  uot  adjust  themselves  as  rapidly  as  did 
prices  of  commodities,  and  consequently  the  purchasing 
power  of  earnings  was  greatly  diminished  and  a  heavy 
load  placed  upon  certain  classes  of  workers  whose  earn- 
ings did  not  increase  proportionately  and  also  upon 
p-ersons  with  fixed  incomes.  Another  effect  of  the  exces- 
sive currency  issues  was  seen  in  the  derangement  of 
foreign  exchanges.  This  was  due  in  a  measure  to  the 
disorganization  of  trade  movements  and  to  the  shift  in 
trade  balances,  but  in  part  it  must  be  attributed  to 
the  uneven  depreciation  of  the  currency  in  the  different 
countries  which  resulted  from  their  different  degrees  of 
resort  to  inflation.  The  position  of  the  banks,  too,  has 
been  greatly  affected  by  the  changes  which  have  taken 
place  in  bankable  paper.  Their  assets  have  been  very 
largely  transformed  from  the  short  term  paper  of  manu- 
facturers and  merchants  to  Government  obligations  of 
one  kind  or  another.  The  solvency  of  the  banks  is 
linked  very  closely  with  the  credit  of  the  states.  It 
would  seem,  therefore,  that  the  problem  of  the  retire- 
ment of  the  bank  circulation  cannot  be  solved  until  that 
of  the  payment  of  the  debts  themselves  has  been  met. 

Why  should  inflation  have  been  permitted?  The  les- 
son of  history  on  this  point  w^as  clear  and  well  under- 
stood. The  experiences  of  France  during  the  Revolution, 
of  England  during  the  Napoleonic  wars,  and  of  the 
United  States  during  the  Civil  War  were  all  matters  of 
record  and  offered  sufficient  warning  against  repeating 
the  mistakes  of  these  periods.  There  was  not  in  the 
World  War,  it  is  true,  a  repetition  of  the  grosser  form 
of  inflation  by  the  issue  of  irredeemable  government 
paper  money ;  it  took  the  subtler  form  this  time  of  the 
expansion  of  bank  notes  and  of  bank  credits.  It  may 
be  that  in  some  quarters  there  was  a  hope  that  for  this 

359 


WAR  COSTS  AND  THEIR  FINANCING 

reason  the  obvious  results  of  inflation  might  be  avoided. 
But  a  more  likely  and  sufficient  explanation  is  the  urgent 
necessity  that  all  Governments  v^^ere  under,  of  raising 
money  at  once  in  the  easiest  way. 

In  some  cases,  notably  in  Germany,  the  view  was  held 
and  acted  upon  that  a  plentiful  supply  of  money  would 
ease  the  transition  from  peace  to  war  economy,  and  this 
notion  doubtless  had  its  influence  in  other  countries. 
It  is  not  difficult  to  find  expressions  of  satisfaction  dur- 
ing the  earlier  years  of  the  war  that  war  financing  had 
been  accomplished  so  easily  and  without  violently  affect- 
ing rates  in  the  money  markets.  This  was  avoided  by 
the  issuance  of  paper  money  and  also  by  the  elimination 
of  indi:.strial  issues  which  might  compete  with  Govern- 
ment loans.  In  other  words,  the  stand  was  taken  that 
the  flotation  of  loans  was  aided  by  the  debasement  of  the 
currency.  Once  entered  upon,  this  policy  doubtless 
received  further  encouragement  from  the  desire  of  the 
Ministers  of  Finance  to  keep  down  the  rate  of  interest 
on  the  enormous  loans  which  followed  one  another  in 
such  rapid  succession. 

From  another  standpoint  the  inflation  of  the  currency 
with  the  consequent  rise  of  prices  aided  the  policy  of 
the  Governments  in  financing  the  war  by  curtailing  the 
consumption  of  nonessentials,  thereby  setting  free  for 
war  purposes  labor  and  capital  that  would  otherwise 
have  gone  to  other  lines  of  production.  Later  it  was 
sought  to  secure  this  end  by  rationing,  by  thrift  cam- 
paigns, and  finally  by  taxation.  It  may  fairly  be  argued 
that  an  earlier  and  more  drastic  resort  to  this  last  method 
would  have  rendered  the  policy  of  inflation  with  all  its 
attendant  evils  necessary  in  a  much  less  degree.  It 
may  well  be  doubted  whether  a  war  of  such  magnitude 
could  have   been   carried   on   without   some   degree   of 

360 


PROBLEMS  OF  CURRENCY  AND  DEBT 

inflation,  but  that  it  could  have  been  greatly  minimized 
is  hardly  open  to  doubt. 

The  evil  effect  of  inflation  on  the  Treasury,  not  to 
mention  other  results,  lies  in  the  fact  that  the  Govern- 
ment receives  in  taxes  or  from  the  sale  of  its  bonds 
money  which  is  constantly  declining  in  purchasing 
power.  After  the  war,  with  the  return  of  more  normal 
conditions  and  the  gradual  contraction  of  the  currency, 
these  bonds  will  be  redeemed  in  dollars  of  higher  pur- 
chasing power.  The  loss  to  the  Government  is  measured 
by  the  difference  between  the  two  measures  of  value. 
But  this  loss  is  accompanied  by  a  social  cost  which  is 
infinitely  greater  and  more  widespread,  and  may  carry 
with  it  serious  social  and  industrial  disorganizations  and 
readjustments,  leading  possibly  to  revolution  and  in 
extreme  instances  to  complete  anarchy.  It  is  going  too 
far  to  claim  any  causal  connection  between  the  two,  but 
it  is  noteworthy  that  Bolshevism  should  have  proceeded 
furthest  in  Russia,  where  the  debasement  of  the  currency 
far  exceeded  that  in  any  other  nation.  Moreover,  indus- 
trial unrest  is  probably  greatest  in  the  other  countries 
that  have  most  closely  followed  Russia  in  this  direction. 

The  remedy  for  the  evils  of  inflation  is  contraction. 
But  when  this  is  said,  the  problem  has  merely  been  stated 
in  anotlier  form,  for  the  question  at  once  presents  itself 
as  to  how  and  when  such  contraction  is  to  be  effected. 
In  the  case  of  direct  Government  issues,  the  inability  of 
the  Government  in  the  majority  of  cases  to  meet  present 
budget  requirements  out  of  revenue  will  effectually  pre- 
vent any  retirement  of  the  noninterest  bearing  debt. 
However  bad  may  be  the  effects  of  an  inflated  currency, 
it  is  not  to  be  expected  that  any  considerable  part  of 
tlie  proceeds  of  taxation  ^^^ll  be  devoted  to  its  reduction. 
The  most  that  can  be  hoped  for  is  tlie  accumulation  by 

361 


WAR  COSTS  AND  THEIR  FINANCING 

the  issuing  country  of  a  sufficient  metallic  reserve  to 
deprive  the  issues  of  the  character  of  fiat  money. 

The  expansion  of  note  circulation  and  of  credit 
deposits  on  the  part  of  the  banks  would  under  normal 
conditions  automatically  correct  itself ;  as  loans  fell  due, 
the  credit  would  be  cancelled,  and  as  the  notes  were 
presented  for  redemption,  they  would  be  retired.  In 
circumstanci3s  as  they  exist  in  Europe,  however,  neither 
of  these  things  is  necessarily  true.  Since  the  notes 
represent  for  the  most  part  compulsory  advances  to  the 
State  and  bear  little  or  no  relation  to  the  metallic 
reserve,  it  may  be  impossible  for  the  banks  to  resume 
specie  payments  and  thus  to  permit  the  working  out  of 
the  principles  of  supply  and  demand.  The  huge  de- 
posits of  the  banks,  too,  are  in  large  part  public  deposits 
and  will  not  be  immediately  reduced,  since  the  obliga- 
tions upon  whicli  they  rest  will  presumably  be  renewed 
many  times.  Ultimately,  however,  this  debt  of  the  State 
will  be  funded  and  the  banks  permitted  to  resume  their 
commercial  functions.  But  even  then  a  reduction  in  the 
media  of  exchange  cannot  be  looked  for.  The  issues  of 
enormous  quantities  of  bonds  have  afforded  unexcelled 
collateral  for  bank  credit,  and  with  a  better  knowledge 
of  the  advantages  of  deposit  banking  in  Europe,  further 
expansions  of  bank  currency,  rather  than  its  reduction, 
may  be  expected.  This  is  even  more  true  of  the  United 
States,  where  the  people  are  already  thoroughly 
habituated  to  the  use  of  checks,  and  where  the  presence 
of  an  enormous  gold  reserve,  which  is  not  likely  to  leave 
the  country,  except  in  inconsiderable  quantities,  as  long 
as  the  present  favorable  trade  balances  persist,  will  per- 
mit a  still  further  expansion  of  credit. 

Another  difficulty  connected  with  the  resumption  of 
specie  payments  by  the  banks  is  the  uneven  distribution 

362 


PROBLEMS  OF  CURRENCY  AND  DEBT 

of  gold  among  the  nations  of  the  world.  The  United 
States  possesses  a  gold  reserve  which  constitutes  prob- 
ably the  largest  store  of  gold  ever  brought  together 
since  the  beginning  of  recorded  history.  The  holdings  of 
the  Federal  Reserve  Banks  amounted  on  June  25,  1920, 
to  $1,971,696,000.  The  Bank  of  Russia  stands  second 
on  the  basis  of  the  last  published  report  of  that  institu- 
tion, October  20,  1917,  but  it  is  scarcely  conceivable  that 
this  reserve  has  remained  intact.  The  Bank  of  France, 
which  comes  next,  may  therefore  be  given  second  place 
with  a  total  stock  on  June  24,  1920,  of  $1,116,000,000, 
including  that  held  abroad.  The  Imperial  Bank  of 
Germany  holds,  or  held,  the  fourth  largest  amount  of 
gold.  On  October  7,  1918,  it  held  $620,000,000,  the 
greatest  reserve  of  any  time  during  the  war,  but  this 
amount  steadily  declined  after  that  time,  partly  as  a 
result  of  the  restitution  of  the  gold  taken  from  Belgium 
and  from  Russia  and  partly  as  a  result  of  payments  for 
food  and  raw  materials.  By  March,  1919,  the  gold  held 
by  the  Reichsbank  had  declined  to  about  $456,000,000, 
and  by  June  24,  1920,  it  had  sunk  to  $272,000,000. 
At  that  time,  therefore,  Germany  was  surpassed  by  both 
Great  Britain  and  Japan.  The  total  gold  holdings  of 
the  Bank  of  England,  including  the  coin  and  bullion  held 
against  the  currency  notes,  amounted  on  June  24,  1920, 
to  $589,000,000.  The  gold  held  by  the  Bank  of  Japan 
amounted  on  March  27,  1920,  to  $461,000,000.  The  Bank 
of  Italy  reported  its  total  "  cash  "  at  $298,000,000  on 
May  20,  1919,  but  this  included  items  other  than  gold; 
by  June  24,  1920,  the  gold  reserve  had  shrunk  to 
$160,900,000. 

The  reserves  of  the  banks  of  the  neutral  countries 
have  all  been  greatly  strengthened,  but  a  few  of  the 
former  belligerents  lost  practically  all   the   gold  they 

363 


WAR  COSTS  AND  THEIR  FINANCING 

formerly  held.  The  reserves  of  the  Bank  of  Rumania 
have  probably  been  lost  as  a  result  of  their  removal  to 
Moscow.  The  gold  reserves  formerly  held  by  the  Austro- 
Hungarian  Bank  and  the  Ottoman  Bank  were  drained 
off  in  payments  to  the  Reichsbank,  and  now  the  reserves 
of  the  latter  are  being  depleted  by  the  payments  for  food 
supplies.  Before  the  belligerent  nations  of  Europe  can 
resume  specie  payments,  it  is  evident  that  some  of  them 
must  purchase  gold,  and  that  all  of  them  will  have  to 
reduce  their  outstanding  issues  and  bring  the  notes  into 
a  more  correct  relation  to  the  metallic  reserves. 

A  reference  to  the  table  on  pages  352-3  will  show  the 
percentage  which  the  gold  reserves  constitute  of  the 
note  issues  in  the  countries  there  listed.  The  warning 
should  be  given  at  this  point  that  the  sums  of  gold  thus 
listed  are  not  held  against  the  note  issues,  but  constitute 
the  total  gold  reserve  of  the  bank  against  all  liabilities. 
Even  assuming  that  they  were  available  exclusively  for 
note-redemption  purposes,  it  is  evident  that  it  will  be 
impossible  for  the  banks  of  Russia,  Germany,  Austria- 
Hungary,  Italy,  and  Finland,  and  probablj'-  France,  to 
attempt  redemption  of  the  outstanding  issues  without 
materially  strengthening  their  reserves.  If  this  pro- 
gram is  carried  out,  years  must  elapse  before  specie 
payments  can  be  resumed.  The  more  radical  method  of 
deflation  by  devaluation  may  be  adopted  by  some  of  the 
countries  as  the  quickest  solution  of  the  difficulty 

The  production  of  gold  in  the  world  fell  off  during 
the  very  period  when  these  enormous  additions  were 
being  made  to  the  note  issues.  Partly  as  a  result  of  the 
rising  cost  of  production,  which  affected  gold  mining  as 
well  as  other  activities,  and  partly  because  of  other 
factors,  such  as  the  cutting  off  of  the  Russian  supply 
and  the  exhaustion  of  the  Australian  mines,  the  output 

364 


PROBLEMS  OF  CURRENCY  AND  DEBT 

of  gold  has  shown  a  steady  decrease  since  1015.  The 
following  table  shows  the  annual  gold  production  of 
the  world  for  the  six  years  1914-1919  :* 

1914 $439,078,260 

1915 470,466.214 

1916 454,176.500 

1917 423.950.200 

1918 380.924,700 

1919 365,166,000 

The  problem  of  the  restoration  of  the  gold  standard 
is  complicated  by  the  falling  off  in  production  at  the 
wry  time  when  the  need  for  larger  gold  reserves  is 
greatest.  It  would  seem,  therefore,  that  the  adjustment 
of  note  issues  to  reserves  must  be  made  by  the  diminution 
of  the  former  rather  than  by  the  increase  of  the  latter. 
As  any  other  method  would  result  in  a  further  addition 
of  money  to  a  supply  already  too  large,  this  process 
must  be  commended.  It  may  be  noted  at  this  point  that 
such  a  process  of  reducing  the  outstanding  note  issues 
has  been  initiated  in  Hungary,  Italy,  and  France  dur- 
ing the  first  half  of  1920. 

A  further  complication  arises  from  the  unwillingness 
of  those  countries  possessing  considerable  stocks  of  gold 
to  part  with  it.  None  of  the  European  nations  has  as 
yet  removed  its  embargo  upon  the  export  of  gold  on 
private  account,  and  Great  Britain  prohibited  exports 
after  April  1,  1919.  On  the  other  hand,  the  prohi])ition 
of  the  expert  of  gold  from  the  United  States,  which  was 
imposed  shortly  after  this  country  entered  the  war,  was 
removed  in  June,  1919.  Since  the  movement  of  gold  is 
toward,  rather  than  away  from,  the  United  States,  how- 
ever, except  to  a  few  Latin- American  and  Oriental  coun- 
tries, there  does  not  exist  to-dav  such  a  thing  as  a  free 

*  Federal  Reserve  Bulletin,  Jamiarv,   1919,  p.  19. 

365 


WAR  COSTS  AND  THEIR  FINANCING 

world  movement  of  gold  as  a  corrective  of  unfavorable 
rates  of  exchange. 

Not  merely  are  the  note  issues  excessive  in  amount  and 
subject  to  varying  degrees  of  depreciation;  they  have 
also  but  a  limited  currency,  as  they  are  in  many  cases 
so  thoroughly  distrusted  by  neighboring  countries  as  to 
be  refused  acceptance.  As  a  result  of  the  fluctuations 
in  the  value  of  the  currency  and  consequently  in  the 
rates  of  foreign  exchange,  a  highly  speculative  feature 
has  in  many  cases  been  introduced  into  trade  v^hich  acts 
as  a  retarding  influence.  In  certain  sections  monetary 
transactions  have  all  but  broken  down  and  trade  has 
reverted  to  barter.  Among  certain  of  the  States  that 
formerly  made  up  the  Austrian-Hungarian  Empire 
and  among  the  Balkan  States,  the  attitude  of  each 
State  toward  its  neighbor  is  so  hostile  that  exchange  has 
almost  ceased.  The  following  condensed  account  taken 
from  an  Austrian  paper  illustrates  this  point  vividly  :^ 

Permission  to  place  any  amount  to  the  credit  of  a  German- 
Austrian  or  a  Vienna  bank  Avith  a  Bohemian  branch  is  as  a 
rule  only  granted  by  the  bank-note  clearing  house,  in  cases 
of  the  import  from  German  Austria  of  goods  urgently  needed 
in  Bohemia  and  which  come  for  the  most  part  under  com- 
pensation traffic  and  cover  only  a  part  of  the  debts  which 
German  Austria  should  collect  for  supj^lies  of  sugar,  coal,  and 
other  necessities  from  Bohemia.  GeiTuan-Austrians,  too,  can 
be  given  credit  grants  only  Avith  the  approval  of  the  clearing 
house.  .  .  .  ]\Iattcrs  are  further  comi^licated  by  the  absence 
of  a  note  bank  in  Czecho-Slovakia  at  which  commercial  bills 
and  loans  on  effects  could  be  mobilized.  .  .  .  Monetary 
transactions  with  Poland  are,  of  course,  quite  at  a  standstill, 
s'nce,  in  addition  to  the  prohibition  upon  import  of  kronen, 
all    ])ostal   and   telegraphic    traffic   is    suppressed.      German- 

^  OestcrreicliiscJie  VoJkswirt,  May  10,  1919,  quoted  in  "Recon- 
struction Supplement  "  to  the  [British]  Review  of  the  Foreign 
P7CSS,  London,  June  18,  1919. 

366 


PROBLEMS  OF  CURRENCY  AND  DEBT 

Austrian  banks  only  receive  news  of  their  branches  from 
time  to  time  by  courier,  and  orders  for  payment  can  only 
be  passed  through  the  same  channels.  .  .  .  The  Ukraine 
has  introduced  a  compulsory  rate  of  exchange  of  one-half 
karhovoiiez  for  the  krone.  There  are  practically  no  money 
transactions  with  the  Ukraine,  and  it  is  only  through  the  few 
couriers  that  the  payments  can  be  made.  .  .  .  Jugo-Slavia 
has  taken  the  most  stringent  measures  against  money  trans- 
actions with  German  Austria.  In  addition  to  the  note  stamp- 
ing and  the  prohibition  of  import  and  export  of  currency, 
it  has  api^lied  to  German  Austria  the  old  Serbian  law  for- 
bidding payments  to  the  enemy,  so  that  German  Austria  can 
no  longer  use  its  possessions  in  Jugo-Slavia.  Exchanges 
between  Jugo-Slav  kronen  and  German-Austrian  currency 
are  as  rare  as  between  Czech  and  German- Austrian  kronen. 

So  far  as  the  immediate  future  is  concerned,  there 
seems  little  evidence  that  a  diminution  of  the  European 
notes  now  issued  will  be  effected  or  that  the  expanded 
bank  credits  will  be  reduced.  On  the  contrary,  there  is 
every  reason  to  believe  that  these  will  be  further 
increased.  New  credits  are  being  asked  for  the 
rehabilitation  and  reconstruction  of  Europe.  Further 
loans  are  being  floated  by  the  European  countries, 
neutral  as  well  as  belligerent,  for  the  most  part  in  the 
United  States,  but  sometimes  also  at  home.  Until  these 
new  securities  are  "  digested,"  they  will  serve  as  the 
basis  of  further  expansion  of  deposits  and  to  that  extent 
will  increase  the  existing  inflation. 

In  addition  to  these  sums,  German  indemnity  bonds 
will  probably  soon  appear  on  the  market.  Although  the 
method  of  their  distrilnition  is  not  clear,  it  is  altogether 
probable  that  they  will  be  made  the  basis  of  further 
borrowings  and  credit  expansion  and  thus  still  further 
increase  the  existing  inflation.  It  is  improbable,  in  view 
of  these  conditions,  that  deflation  will  occur  soon  or  on 

367 


WAR  COSTS  AND  THEIR  FINANCING 

any  appreciable  scale.  On  the  contrary,  we  may  rather 
look  forward  to  a  continuation  of  present  high  prices  in 
most  nations.  So  far  as  these  are  due  to  scarcity  of 
goods,  this  factor  will  gradually  be  corrected  by  the 
resumption  of  normal  activities  throughout  the  world. 
But  so  far  as  they  are  attributable  to  currency  and 
credit  inflation,  no  decided  change  can  be  expected  for 
se\'eral  years.  It  may  be  assumed  that  the  world  has 
entered  upon  a  more  or  less  permanent  higher  price 
level.  The  necessary  adjustments  can  be  made  most 
quickly  and  easily  in  the  United  States,  but  even  here  a 
complete  return  to  pre-war  conditions  need  not  be 
expected  for  some  time. 

Difficult  as  are  the  problems  raised  by  the  currency 
and  banking  situation,  those  connected  with  the  public 
debt  are  even  more  grave.  The  growth  of  the  debt  in 
most  of  the  belligerent  countries  proceeded  more  rapidly 
than  the  enlargement  of  the  tax  system,  so  that  the 
revenue  in  these  countries  is  insufficient  to  meet  the 
ordinary  expenditures  of  government  and  the  interest 
on  the  public  debt.  Indeed,  for  the  European  belliger- 
ents the  revenues  barely  sufficed  to  meet  either  one  of 
these  items  alone.  If  the  debts  were  completely 
expunged,  the  financial  situation  would  still  present 
difficulties;  and  with  the  charges  for  debt  service 
unchanged  and  ever  increasing,  the  problem  is  serious 
in  the  extreme.  The  ordinary  civil  expenditures  have 
increased  greatly  from  those  of  the  pre-war  period, 
though  not  in  the  same  proportion  as  the  interest 
charges.  The  following  table  shows  for  the  leading 
countries  the  amounts  that  it  was  necessary  to  raise  for 
the  civil  budget  and  for  interest  charges  on  the  debt,  and 
the  revenues,  for  the  fiscal  year  following  the  Armistice : 

368 


PROBLEMS  OF  CURRENCY  AND  DEBT 


Civil  Budgets,  Revenues,  and  Interest  Charges  of  Leading 

Belligerents 

(Jn  millions) 


United  States.  .  . 
United  Kingdom 

France 

Russia 

Italy 

Germany 


Year  ended 


Jmie  30,  1919 
March  31,  1919 
Dec.  31,  191S 
Dec.  31,  1917 
June  30,  1919 
March  31,  1919 


Pre-war 

civil 
budget 


Interest     Revenue 
charge    \      last 
last  fiscal       fiscal 
year  year 


$702.2 

987.4 

1,013.3 

1,547.1 

625.8 

851.3 


$Gij.9 

1,332.6 

1,113.5 

371.2 

800.0 

1,975.0 


S4,647.6 
4,444.1 
1,642.5 
1,870.0 
1,492.0 
1,533.8 


It  is  evident  from  this  table  that  in  none  of  these 
countries  except  the  first  two  were  revenues  sufficient 
to  meet  the  pre-war  charges  for  the  civil  budget  and 
those  for  interest  on  the  debt  during  the  last  year  of 
the  war.  Both  of  these  items,  however,  will  be  in  the 
future  much  higher  than  the  figures  here  given.  It  is 
a  commonplace  of  financial  history  that  after  every 
great  war  the  expenditures  of  government,  the  functions 
of  which  have  been  expanded  as  a  result  of  the  struggle, 
never  return  to  their  former  amount  but  remain  upon  a 
permanently  higher  level.  This  will  undoubtedly  be 
true  of  the  countries  whose  budgets  are  here  shown.  In 
fact,  for  the  next  few  years  it  may  be  predicted  that 
they  will  be  several  times  as  much  as  the  last  pre-war 
budget.  In  the  second  place,  the  interest  charges  given 
in  this  table  are  considerably  below  the  actual  payments 
that  will  have  to  be  met,  since  these  do  not  include  the 
interest  on  the  floating  debt,  w^hich  in  some  cases  is 
extremely  large,  or  the  interest  on  new  loans  now  being 
issued  which  will  swell  the  charges  to  still  greater  sums. 

369 


WAR  COSTS  AND  THEIR  FINANCING 

And,  finally,  the  revenues  will  with  difficulty  be  in- 
creased now  that  the  war  is  over,  and  in  some  cases  may 
be  expected  to  diminish  as  a  result  of  the  termination  of 
the  war-profits  taxes  and  other  strictly  war  levies. 

A  more  adequate  picture  of  the  enormity  of  the  debts 
that  have  been  incurred  as  a  result  of  the  war  will  be 
furnished  by  a  statement  of  the  amounts  of  the  debts 
rather  than  of  the  interest  payments.  If  the  population, 
the  national  wealth,  and  national  income  be  also  pre- 
sented, some  notion  will  be  gained  of  the  ability  of  the 
various  countries  to  cope  with  their  existing  debts.  Such 
a  statement  is  given  in  the  following  table : 

Population,  Wealth,  and  Debts  of  Belligerents 
{In  millions  of  dollars) 


United  States. ... 
United  Kingdom. 

France 

Russia 

Italy 

Germany 

Austr  ia-Hmigary . 


Pre-war 
population 


102,826,000 
46,499,000 
39,948,000 

141,679,000 
35,097,000 
68,442,000 
51,080,000 


Pre-war 
wealth 


$220,000 
72,500 
59,000 
60,160 
25,200 
83,250 
40,000 


Pre-war 
income 


$38,000 
11,250 
7,300 
6,500 
4,000 
10,500 
5,500 


Total 
debt* 


$24,648 
40,385 
46,025 
25,000 
18,758 
t49,250 
t27,000 


*  As  of  March  31,  1920,  except  for  Ru  sia,  in  which  the  debt  is 
of  October  1,  1917.     f  Exclusive  of  indemnities. 


Tliese  figures  are  so  stupendous  that  they  fail  to 
convey  a  definite  impression.  The  mind  refuses  to  grasp 
a  figure  running  into  a  dozen  digits.  A  more  compre- 
hensible view  of  the  burden  is  obtained  from  a  statement 
of  per  capita  debt,  and  such  figures  indicate  also  more 
clearly  the  relative  burdens  borne  by  the  different 
nations.     But  a  per  capita  distribution  of  debt  alone 

370 


PROBLEMS  OF  CURRENCY  AND  DEBT 

tells,  after  all,  very  little  a.s  to  tlie  ability  of  tlie  different 
nations  to  meet  their  obligations.  Clearer  light  is  thrown 
on  this  problem  by  comparing  the  per  capita  debt  and 
interest  charges  with  the  ptr  capita  national  wealth  and 
national  income,  which  are  shown  in  the  following  table : 

Per  Capita  Wealth,  Income,  and  Debts  of  Belligerents 


Pre-war 
wealth 


Pre-war 

Present 

income 

debt 

$360 

$240 

250 

869 

190 

1150 

46 

177 

115 

536 

150 

720 

105 

530 

Present 
interest 
charge 


United  States 

United  Kingdom.  . 

France 

Russia 

Italy 

Germany* 

Austria-Hungary  * . 


$2 , 120 

1,590 

1,515 

425 

720 

1,220 

784 


$10 
37 
63 
3 
26 
45 
32 


*  Exclusive  of  indemnities. 


Conclusions  based  upon  these  tables,  however,  must 
be  used  with  caution,  for  the  statistics  of  population, 
wealth,  and  income  are  based  upon  pre-war  computa- 
tions, and  in  practically  every  instance  there  has  been 
a  decline  in  the  population  while  the  real  wealth  and 
income  are  less  to-day  than  they  were  before  the  war, 
although  their  nominal  amounts  have  increased  as  a  result 
of  the  higher  price  level.  The  debts  are  steadily  grow- 
ing and  are  in  almost  every  instance  greater  to-day  than 
they  were  when  these  tables  were  compiled.  So  far  as 
the  tables  err,  therefore,  it  is  in  the  direction  of  a  more 
favorable  showing  than  the  present  facts  warrant. 

But  favorable  though  it  may  be,  the  facts  shown  are 
ominous  in  the  extreme.  Will  it  be  possible  for  the 
nations  of  Europe  to  carry  successfully  these  staggering 

371 


WAR  COSTS  AND  THEIR  FINANCING 

burdens?  Although  it  is  not  possible  to  give  a  cate- 
gorical answer  to  such  a  question,  some  light  may  be 
thrown  upon  it  by  a  study  of  the  probable  revenues  of 
the  different  countries.  This  is  attempted  in  the  follow- 
ing chapter.  The  ability  to  meet  the  current  charges 
for  debt  service  depends,  after  all,  upon  the  revenue- 
producing  capacity  of  the  different  countries. 

Although  not  of  such  immediate  importance,  the  ques- 
tion of  the  ultimate  disposition  of  the  principal  of  the 
debt  is  intimately  bound  up  with  that  of  payment  of 
the  interest.  Assuming  that  the  interest  charges  will  be 
met,  are  the  debts  likely  to  be  paid  off  or  will  they 
remain  as  a  permanent  legacy  of  the  war?  In  spite  of 
the  accepted  policy  of  the  United  States  on  this  point, 
the  principle  of  debt  payment  is  not  universally 
accepted.  The  European  and  the  American  theories  on 
the  desirability  of  the  payment  of  a  public  debt  are  in 
broad  contrast.  In  general,  the  European  theory  favors 
a  perpetual  debt,  whereas  the  British  and  American 
theory  provides  for  the  repayment  of  the  debt.  This 
distinction  is  clearly  indicated  by  the  maturities  shown 
in  the  bonds  issued  by  the  different  countries.  Those 
for  the  United  States  and  Great  Britain  and  her  colonies 
are  without  exception  terminable  at  a  fixed  date,  the 
longest  maturity  being  30  years.  In  France,  Italy, 
Germany,  and  Hungary,  on  the  other  hand,  the  larger 
part  of  the  debt  was  thrown  into  the  form  of  a  perpetual 
debt,  that  is,  one  without  a  fixed  date  of  maturity. 
Russia  and  Austria  are  apparent  exceptions  to  the  rule, 
for  their  war  debts  were  in  every  case  given  fixed 
maturities. 

In  favor  of  the  European  theory  of  a  perpetual 
indebtedness  it  is  argued  that  the  growth  in  population 

372 


PROBLEMS  OF  CURRENCY  AND  DEBT 

and  wealth  of  a  country  gradually  lessens  the  burden 
of  a  debt,  which  is  measured  by  the  annual  interest 
charge,  even  though  no  reduction  take  place  in  the 
principal.  Thus  it  has  been  computed  that  the  pressure 
of  the  English  debt  in  1815  was  equivalent  to  nine  per 
cent,  of  the  yearly  national  income.  In  1880,  as  a  result 
of  the  growth  of  national  wealth,  it  was  less  than  three 
per  cent,  although  the  debt  had  remained  nearly  station- 
ary in  the  interval.  In  France  the  capitalized  sum  of 
the  debt  increased  more  than  threefold  between  1840 
and  1870,  but  the  pressure  of  the  annual  payments 
demanded  by  the  debt  was  0.022  and  0.023  of  the 
national  income  for  the  two  periods;  that  is  to  say,  the 
increase  in  the  debt  was  not  felt  as  an  additional  burden 
because  of  the  concomitant  growth  in  national  wealth. ° 
These  and  similar  facts  have  often  been  cited  as  argu- 
ments to  prove  that  the  best  as  well  as  the  easiest  method 
of  dealing  with  the  public  debt  is  to  let  the  nation  grow 
up  to  it. 

Another  argument  in  favor  of  a  perpetual  debt  is 
based  upon  the  assumed  burdenlessness  of  a  domestic 
debt.  If  the  bonds  are  entirely  owned  at  home,  as  is 
the  case  in  most  of  the  war  debts,  the  raising  of  taxes  to 
pay  interest  charges,  it  is  said,  imposes  no  real  burden 
upon  the  people,  as  the  money  is  simply  taken  out  of  one 
pocket  and  put  into  anotlier.  Tliis  might  be  true  up  to 
a  certain  point  if  the  persons  who  paid  the  taxes  and 
those  who  received  the  interest  payments  were  identical. 
But  as  they  seldom  are,  there  is  involved  in  any  sucli 
process  an  actual  redistribution  of  the  national  income. 
Such  redistribution  may  be  beneficial,  but  it  is  more 
likely,  if  the  lessons  of  history  may  be  accepted  as  a 
guide,  to  have  undesirable  consequences. 

« H.  C.  Adams,  Public  Debts,  o.  243 

373 


WAR  COSTS  AND  THEIR  FINANCING 

Whatever  weight  such  arguments  may  have  possessed 
for  European  countries,  they  have  been  without  efifect 
in  this  country,  where  from  the  beginning  of  our  history 
a  policy  of  rapid  debt  payment  has  been  traditional  and 
has  been  carried  out  in  practice.  The  population  and 
wealth  of  the  country  have  grown  so  rapidly  that  this 
policy  has  been  carried  through  with  comparatively 
little  effort.  It  has  been  regarded  as  desirable  that  the 
way  should  be  cleared  for  new  tasks  by  the  removal  as 
speedily  as  possible  of  burdens  handed  down  from  the 
past.  Such  a  policy  seems  to  be  called  for  even  more 
urgently  at  the  present  time  because  of  the  growing 
demands  that  will  undoubtedly  be  made  upon  the 
Federal  Government  in  the  future.  There  has  long 
been  evident  in  the  United  States  a  centralization  of 
administrative  functions  in  the  Federal  Government 
which  has  been  greatly  hastened  by  the  events  of  the 
war.  A  vast  growth  of  expenditures  may  be  expected 
in  the  near  future,  especially  as  a  result  of  the  larger 
demands  for  social  insurance,  old-age  pensions,  improve- 
ment of  internal  navigation,  government  aid  to  railroads, 
and  similar  measures.  It  is  desirable,  therefore,  to 
expunge  the  war  debt  as  rapidly  as  possible,  and  leave 
the  Government  financially  unhampered  and  able  to 
undertake  fresh  duties. 

Moreover,  the  period  immediately  after  the  war  is 
favorable  for  the  payment  of  the  war  debt,  unless  the 
losses  have  proved  excessively  severe,  for  taxes  have 
been  expanded,  industries  are  adjusted  to  the  new  taxa- 
tion requirements,  and  business  is  prospering  as  a  result 
of  higher  prices.  Where  su'ch  conditions  prevail,  little 
resistance  will  be  made  to  a  policy  of  debt  payment,  and 
this  on  the  whole  is  true  of  the  United  States. 

It  is  not  surprising,  consequently,  to  find  a  policy  of 
374 


PROBLEMS  OF  CURRENCY  AND  DEBT 

rapid  debt  payment  proposed  for  this  country  by  the 
Secretary  of  the  Treasury  soon  after  the  cessation  of 
hostilities.  Provision  was  made  for  the  retirement  of 
the  war  debt  in  the  Victory  Liberty  Loan  Act  of  March 
3,  1919,  by  the  creation  of  a  cumulative  sinking  fund. 
There  is  to  be  applied  to  the  payment  of  the  debt  for 
the  fiscal  year  beginning  July  1,  1920,  and  for  each  fiscal 
year  thereafter  an  amount  equal  to  the  sum  of  (1)  21/2 
per  cent,  of  the  aggregate  amount  of  bonds  and  notes  out- 
standing on  July  1, 1920,  less  the  par  value  of  any  obliga- 
tions of  foreign  Governments  lield  ])y  the  United  States 
on  that  date,  and  (2)  the  interest  that  would  have  been 
payable  during  the  fiscal  year  for  which  the  appropria- 
tion was  made  on  all  bonds  and  notes  redeemed  out  of 
the  sinking  fund.  Under  this  scheme  an  average  of 
about  $1,500,000,000  would  be  called  for  annually  as 
payment  into  the  sinking  fund.  If  these  payments  were 
maintained  inviolably  the  debt  would  be  expunged  in 
about  25  years/  If  the  American  people  will  submit 
to  the  continuation  of  taxation  for  debt  purposes  in 
such  an  amount,  the  debt  could  be  expunged  by  1947, 
when  the  last  bonds  fall  due.  This  would  be  an  achieve- 
ment unparalleled  in  the  financial  history  of  the  world. 
It  is  earnestly  to  be  hoped  that  the  policy  of  debt  pay- 
ment may  be  vigorously  prosecuted  and  the  process 
brought  to  as  speedy  a  conclusion  as  possible. 

In  turning  from  the  debt  situation  in  the  United 
States  to  that  in  the  various  European  countries,  one  is 
impressed  with  the  fact  that  the  problem  there  is  not 
so  much  one  of  repayment  of  the  debt  as  of  funding 
the  floating  debt  and  of  maintaining  the  interest  pay- 

'  Hearings  before  the  Committee  on  Ways  and  Meana  on  the 
Fifth  Liberty  Bond  bill,  February  13  and  14,  1919,  p.  59. 

375 


WAR  COSTS  AND  THEIR  FINANCING 

ments  on  the  outstanding  principal.  Civil  expenditures 
and  systems  of  taxation  must  be  adjusted  to  meet  the 
burdens  presented  by  the  existence  of  this  overwhelming 
indebtedness.  The  question  is  not  of  payment,  but  of 
how  to  avoid  repudiation.  Not  unnaturally  in  the  cir- 
cumstances, many  proposals  have  been  made  for  adjust- 
ing the  debt,  some  of  which  may  be  briefly  outlined. 

The  first  and  most  pressing  problem  is  that  of  funding 
the  floating  debts.  Practically  every  belligerent  nation 
emerged  from  the  war  with  a  troublesome,  and  in  some 
eases  an  almost  unmanageable,  floating  debt.  That  of 
the  United  States  is  the  smallest  of  the  major  powers, 
amounting  on  June  30,  1920,  to  $3,597,667,202,  of  which 
$2,768,927,500  represented  certificates  of  indebtedness 
and  $828,739,702  consisted  of  war  savings  certificates. 
This  is  a  reduction  of  $603,471,848  from  the  high  point 
of  $4,201,139,050,  which  it  reached  on  August  31,  1919. 
It  was  not  until  January,  1920,  that  the  Treasury  .was 
able  to  reduce  the  floating  debt  to  manageable  amount 
and  maturities/'^ 

After  that  time  it  was  able  to  pay  off  the  loan 
certificates  and  issue  in  their  place  tax  certificates 
of  indebtedness  which  are  arranged  to  mature  at 
the  dates  of  payment  of  the  income  and  excess  profits 
taxes.  Assuming  that  Congress  neither  authorizes  large 
new  expenditures  nor  reduces  existing  taxes,  it  should 
be  possible  to  clear  away  most  of  this  floating  debt  out 
of  surplus  revenues  by  1922  when  the  first  Victory  Notes 
fall  due. 

Great  Britain  has  various  short-term  obligations  which 

V-a  R.  C.  Leffingwell,  "  Treasury  Methods  of  Financing  the  War 
in  Relation  to  Inflation."  In  Proceedings  of  the  Academy  of 
Political  Science  in  the  City  of  'New  York,  June,  1920,  vol.  ix, 
p.  17. 

376 


PROBLEMS  OF  CURRENCY  AND  DEBT  . 

amount  to  over  $6,500,000,000.  Some  of  these  are  pay- 
able at  once  and  others  fall  due  within  the  present  year, 
but  all  will  have  to  be  funded  into  long  time  bonds  as 
the  Government  cannot  hope  to  pay  them  in  the  immedi- 
ate future.  Indeed,  equilibrium  in  the  budget  will  be 
secured  with  difficulty  even  with  the  present  high  rates 
of  taxation,  and  no  surplus  can  be  counted  upon  for 
retiring  the  floating  debt.  This  consists  of  the  following 
items :® 


Ways   and   Means    advances $1,174,335,000 

Treasury   bills    5,354,935,000 


$6,529,270,000 


In  addition  to  these  debts  "  immediately  due,"  there 
are  also  obligations  maturing  between  April,  1920,  and 
ilarch,  1924,  amounting  to  $7,340,000,000.  Evidently 
the  advances  by  the  United  States  Government  to  Great 
Britain  are  included  in  this  sum,  but  as  this  Govern- 
ment has  the  right  to  extend  final  maturity  to  1938, 
this  debt  will  probably  be  prolonged  to  that  time. 

France  had  a  floating  debt  of  $6,600,000,000  in  short 
time  hons,  treasury  bills,  obligations,  etc.,  most  of  which 
consisted  of  three-  and  six-months  bills.  This  debt  was 
of  the  most  liquid  type,  as  it  fell  due  from  month  to 
month  and  therefore  presented  a  problem  of  the  first 
magnitude,  especially  in  view  of  the  fact  that  France 
was  still  borrowing  to  meet  current  expenditures.  In 
January,  1920,  a  new  loan  was  floated  partly  to  fund 
this  indebtedness  and  partly  to  raise  needed  monej^ 
Subscriptions  amounted  to  $3,140,000,000,  of  which 
$l,600,000,000was  received  in  cash, $1,712,000,000  in  hovs 
and  other  forms  of  floating  debt,  and  the  remainder  in 

^Economist,  June  12,  1920,  p.  1281. 

377 


WAR  COSTS  AND  THEIR  FINANCING 

other  securities.     The  floating  debt  of  Italy  amounts  to 
$4,000,000,000  in  short  maturities. 

Germany  has  a  truly  staggering  floating  debt,  amount- 
ing to  $26,250,000,000  (105,000,000,000  marks).  No 
intimation  of  the  existence  of  this  enormous  indebted- 
ness had  been  given  under  the  monarchical  regime,  and 
it  was  not  until  July,  1919,  that  the  unwelcome  news 
was  finally  broken  to  the  German  people  of  the  accumu- 
lation of  a  floating  debt  of  $18,000,000,000;  since  then 
it  has  grown  steadily  until  on  March  31,  1920,  it 
amounted  to  the  sum  just  named.  That  a  float- 
ing debt  of  such  magnitude  could  have  accumulated  is 
the  strongest  possible  indictment  of  the  German  loan 
policy  of  financing  the  war  that  could  be  framed.  Its 
amount  is  a  measure  of  the  insufficiency  of  the  loans  and 
shows  how  weak  a  reliance  they  proved  themselves  to 
be  in  the  face  of  serious  demands.  This  floating  debt 
indicates  clearly  the  complete  breakdown  of  the  vaunted 
German  loan  policy.  Its  funding  presents  an  almost 
insoluble  problem.^^      Equally  sinister  are  the  floating 

8-a  The  total  debt  of  Germany,  on  IMarch  31,  1920,  was  as  fol- 
lows: 
Funded: 

3  %  Imperial   loan    (pre-war) $400,000,000 

31/2%   Imperial   loan    (pre-war) 500.000.000 

4  %   Imperial  loan    (pre-war) 250.000.000 

5  %    War    loans    18.100.000.000 

41/^%   Treasury   Notes    (war) 2.250.000.000 

5     %    Treasury   Notes    (war) 500.000,000 

•Savings  aad  premium  loan   (since  Armistice)  1.000.000.000 

Total $23,000,000,000 

Floatiiui : 

Discounted  Treasury  bills    $22,875,000,000 

Other  debts  and  obligations 3.375.000.000 

Total  $26,250,000,000 

Grand  Total    $49,250,000,000 

The  floating  debt  is  reported  to  be  increasing  at  the  rate  of 
about  $750,000,000  a  month. 

378 


PROBLEMS  OF  CURRENCY  AND  DEBT 

debts  reported  for  Austria  ($5,700,000,000),  and  Hun- 
gary ($3,780,000,000).  In  view  of  tlie  utter  financial 
collapse  of  these  states  it  is  difficult  to  see  liow  a  satis- 
factory disposition  can  be  made  of  this  indebtedness, 
except  by  some  tour  de  force. 

In  this  connection  it  should  be  pointed  out  that  the 
issues  of  paper  money  are  not  included  in  these  sums, 
which  are,  therefore,  more  favorable  than  the  reality. 
But  inasmuch  as  the  paper  money  issues  do  not  bear 
interest,  they  present  a  problem  of  a  somewhat  different 
character  and  need  not  be  considered  at  this  point. 

The  most  extreme  and  the  least  general  method  of 
facing  the  difficulty  is  that  of  outright  repudiation.  This 
has  been  announced  by  the  Soviet  Governments  of  both 
Russia  and  Hungary.  But  it  is  by  no  means  certain 
that  these  pronouncements  have  finally  disposed  of  the 
debts  of  those  countries.  With  the  return  of  stable 
government  it  may  reasonably  be  expected  that  they 
will  recognize  the  validity  of  the  national  debt.  No 
other  country  has  suggested  the  repudiation  of  the  debt. 

Although  the  ugly  word  "  repudiation  "  has  every- 
where been  scrupulously  avoided,  proposals  that  have 
looked  to  a  scaling  down  of  the  existing  indebtedness 
have  not  been  lacking.  Of  these  the  most  discussed  has 
been  the  plan  for  a  capital  levy.  This  proposal  has  been 
discussed  in  Great  Britain,  France,  Italy,  Germany, 
Austria,  Holland,  and  Switzerland.  In  Great  Britain 
it  has  been  the  subject  of  discussion  for  a  year  or  more 
and  was  taken  up  in  Parliament  by  the  Chancellor  of 
the  Exchequer,  but  the  plan  was  rejected  by  the  Govern- 
ment as  impracticable.  Subsequently,  however,  a  pro- 
posal for  a  levy  on  wealth  gained  during  the  M'ar  wrung 
"  a  guarded  and  apparently  reluctant  assent  "  from  a 
Parliamentary  Cominittee  on  Increases  of  Wealth,  and 

379 


WAR  COSTS  AND  THEIR  FINANCING 

is  even  now  the  subject  of  lively  debate.^'^  In  France 
it  was  accorded  a  less  sympathetic  hearing,  in 
spite  of  its  advocacy  by  I\Ir.  Klotz,  ]\Iinister 
of  Finance,  and  was  later  declared  by  M,  Ribot 
to  be  dead.  From  Italy  came  the  suggestion  that 
"  an  extraordinary  tax  should  be  levied,  divided 
in  a  few  installments,  and  equalling  the  half  of 
private  patrimonies;  and  in  a  short  period  the  war  debt 
will  be  liquidated  without  causing  any  harmful  dis- 
turbance of  values,  salaries  or  profits,  or  the  whole 
organization  of  the  national  economy."^  On  July  10, 
1919,  Minister  of  Finance  Schanzer  proposed  to  the 
Italian  Chamber  a  levy  on  wealth  of  15  per  cent,  to 
reduce  the  internal  debt.  This  plan  was  discarded,  how- 
ever, in  favor  of  a  heavy  graduated  tax  on  war  profits. 
In  Switzerland  the  capital  levy  was  endorsed  by  the 
legislative  bodies  but  defeated  on  a  referendum  by  the 
people;  the  Geneva  State  Council,  however,  has  under 
consideration  a  bill  providing  for  a  levy  on  capital. 
The  Czecho-Slovak  National  Assembly  has  passed  a 
bill  providing  for  a  levy  on  capital  according  to  which 
net  capital  will  be  taxed  from  three  per  cent,  on  $40,000 
to  20  per  cent,  on  $4,600,000,  payable  in  six  install- 
ments; the  announced  purpose  of  the  tax  is  to  raise  the 
value  of  the  currency.  The  Budget  Committee  of  the 
Austrian  National  Assembly  has  under  consideration  a 
bill  which  proposes  a  capital  levy,  payable  partly  in 
cash  and  partly  in  securities,  in  20  annual  installments. 
The  currency  stamping  act  of  Hungary,  according  to 
which  half  of  the  notes  presented  were  funded  into  four 
per   cent,    nontransferable   bonds   which    are   available 

S-'b  Economist,  May  22,  1920,  p.  1039. 

*  Achille  Loria,  "  Italy's  After-War  Problems."  translated  from 
Nuovo  Antologia  in  The  Americas,  November,  1918. 

380 


PROBLEMS  OF  CURRENCY  AND  DEBT 

"  for  payment  of  a  capital  levy,"  presages  clearly  the 
next  step  in  the  deflation  and  debt-reduction  policy  of 
that  country.  Only  in  Germany,  apparently,  has  the 
system  actually  been  put  in  force.  A  tax  has 
been  introduced  in  that  country  providing  for 
a  heavy  capital  levy  under  the  title  of  "  The 
State  Exigency  Tribute."^''  It  is  imposed  upon  all  sub- 
jects of  the  state,  individual  and  corporate,  and  on 
foreign  individuals  and  companies  residing  or  doing 
business  in  Germany,  and  is  levied  on  assets  of  5,000 
marks  ($1,250)  and  above  at  rates  which  progress  from 
10  per  cent,  on  this  amount  to  65  per  cent,  on  amounts 
in  excess  of  100,000,000  marks  ($25,000,000).  The  act 
provided  that  declarations  were  to  be  made  on  Decem- 
ber 31,  1919.  Various  allowances  are  made,  and  pay- 
ments are  spread  over  30  years. 

The  capital  levy  is  a  plan  for  the  conscription  of 
wealth  and  involves  a  heavy  imposition  made  once  for 
all  either  upon  all  kinds  of  capital  or  upon  certain  speci- 
fied kinds,  as,  for  instance,  the  war  bonds  themselves. 
The  plans  actually  proposed  have  generally  involved 
a  levy  upon  all  capital,  and  in  some  cases  the  proposal 
has  been  made  that  it  should  also  be  imposed  upon  the 
capitalized  value  of  large  unearned  incomes.  Payment 
of  the  tax  would  presumably  be  permitted,  not  only  in 
money,  but  in  Government  bonds,  which  would  then  be 
cancelled.  If  the  capital  levy  were  made  equal  in 
amount  to  the  entire  public  debt,  the  slate  would  be 
wiped  clean  by  one  single  transaction,  and  further 
taxation  to  meet  interest  charges  or  redeem  the  principal 
would  be  unnecessary.  A  levy  smaller  in  amount  would 
realize  these  results  in  smaller  measure. 

"J.  Jastrow.  "The  Grerman  Capital  Levy  Tax,."  in  Quarterljf 
Journal  of  Economics,  Mav,  1920. 

381 


WAR  COSTS  AND  THEIR  FINANCING 

As  a  purely  fiscal  problem,  the  strongest  argument  in 
favor  of  the  capital  levy  is  that  it  offers  a  country  a 
method  of  escape  from  an  intolerable  burden  without 
the  necessity  of  repudiation  of  its  national  debt.  If  a 
choice  must  be  made  between  these  two  methods,  there 
seems  to  be  no  doubt  as  to  which  is  the  better.  Repudia- 
tion places  the  whole  burden  upon  the  holders  of  the 
national  bonds.  In  countries  where  subscribers  have 
been  appealed  to  on  grounds  of  patriotism,  such  an  act 
would  be  especially  abhorrent.  The  capital  levy,  on  the 
other  hand,  will  place  the  burden  upon  all  owners  of 
capital  of  whatever  form  and  would  thus  distribute  the 
payment  equitably,  on  the  assumption  that  property 
affords  a  measure  of  ability.  Other  arguments  have 
been  advanced  in  favor  of  the  capital  levy,  but  into  these 
it  is  not  possible  to  enter  here."  Its  advantages  are 
stated  thus  in  Pethick-Lawrence's  book: 

The  effect  of  a  levy  on  capital  will  be  to  wipe  out  the 
whole  or  part  of  the  debt  and  to  give  the  state  a  financial 
interest  in  certain  national  enterprises.  It  will  bring  about 
partial  deflation.  It  Avill  not  change  the  total  aggi'egate  of 
the  Avealth  of  the  country  as  a  whole,  but  will  change  its 
distribution.  It  will  make  it  possible  to  balance  the  budget 
and  rcdiice  direct  taxation.  In  this  way  business  men  with 
moderate  incomes  will  find  the  levy  much  less  hindrance  to 
their  business  than  the  heavy  income  tax  which  will  otherwise 
have  to  be  imposed.  The  persons  who  will  feel  the  weight 
of  the  levy  most  heavily  will  be  the  men  of  great  wealth 
and  those  living  without  personal  exertion  on  the  proceeds 
of  their  investments. 

"  See  Report  of  the  Committee  on  War  Finance  of  the  Ameri- 
can Btonomic  Association,  Supplement  Xo.  2  of  the  American 
Economic  Review,  March,  1919,  p.  69;  F.  W.  Pethick-Lawrence, 
A  Levy  on  Capital,  London,  1918;  A.  C.  Piirou,  The  Economy  and 
Finance  of  the  War,  London,  1910.  A  very  extensive  literature 
on  this  subject  has  grown  up  in  France  and  Germany  during  the 
past  year. 

382 


PROBLEMS  OF  CURRENCY  AND  DEBT 

Although  such  a.  plan  for  scaling  down  the  debt  ucc.l 
not  be  seriously  contemplated  in  the  United  States, 
where  the  war  debt  can  be  easily  carried,  the  problem 
is  quite  otherwise  in  many  of  the  European  countries. 
With  the  possibility  of  a  complete  breakdown  of  national 
credit  impending,  it  may  even  yet  happen  that  other 
Governments  will  follow  the  lead  of  Germany  and  resort 
to  this  method  of  reducing  their  national  burdens.  The 
only  alternative  is  heavy  taxation  over  a  long  period 
of  years. 

Another  method  of  scaling  down  the  debt  would  be 
by  means  of  a  compulsory  reduction  or  postponement  of 
the  interest  charges.  Thus,  Dr.  Rasin,  Minister  of 
Finance  in  Czecho-Slovakia,  suggested  that  the  Austrian 
war  debt  bearing  5i^  per  cent,  interest  should  be  trans- 
formed into  low-interest  bearing  bonds,  say  at  one  or 
two  per  cent,  interest.  This  could  easily  be  done,  in 
his  opinion,  and  would  avert  the  otherwise  probable 
bankruptcy  of  the  State.  As  the  5i/2  per  cent,  bonds 
are  now  selling  at  about  60  and  a  new  two  per  cent, 
bond  would  bring  about  40,  the  loss  to  the  bondholder 
would  be  less  serious  than  the  gain  to  the  State. 

Still  another  method  of  reducing,  in  part  at  least,  the 
indebtedness  of  practically  every  European  participant 
in  the  war  on  the  side  of  the  Entente  Allies  is  for  the 
United  States  Government  to  forgive  the  foreign  Gov- 
ernments the  sums  advanced  them  during  the  war.  This 
would  mean  a  reduction  of  some  $10,000,000,000  in  the 
aggregate  European  war  debt,  distributed  among  the 
different  belligerents  roughly  in  proportion  to  their 
respective  total  indebtedness.  This  suggestion  has 
a,wakened  great  enthusiasm  wherever  it  has  been  made 
in  Europe,  but  as  yet  no  official  notice  has  been  taken 
of  the  suggestion  either  by  foreign  Governments  or  by 

383 


WAR  COSTS  AND  THEIR  FINANCING 

the  United  States.^-  The  Treasury  Department  has, 
however,  arranged  to  postpone  for  three  years  the  col- 
lection of  interest  on  the  Allied  debt,  and  to  spread  the 
accumulated  interest  charges  over  a  series  of  years.  This 
arrangement  provides  a  breathing  spell  during  which 
the  Allied  governments  may  adjust  their  most  pressing 
financial  problems. 

In  the  ease  of  nations  engaged  in  the  war,  a  reduction 
in  their  debt  may  be  effected  by  the  transfer  of  Gorman 
indemnity  bonds.  Thus,  Belgium  is  to  have  her  war 
debt,  incurred  by  borrowing  from  other  Governments, 
liquidated  by  having  German  bonds  substituted  for 
Belgian  bonds.  Other  nations  in  similar  manner  will  be 
able  to  reduce  their  indebtedness  by  the  substitution  of 
German  bonds  for  their  o\^ti.  This  process,  however, 
is  not  to  take  place  at  once,  and  the  amount  that  will 
be  received  from  Germany  as  an  indemnity  is  as  yet 
indeterminate.  The  payments  to  be  made  by  Germany 
other   than   payment   in   kind,  surrender  of  territory, 

^-  This  idea  has  been  endorsed  by  George  W.  Wickersham  in  the 
United  States  (WasJiingion  Post,  October  21,  1918).  while  Senator 
Kenyon  carried  it  to  the  point  of  offering  a  resolution  in  Con- 
gress that  the  United  States  should  cancel  the  financial  obliga- 
tions owed  this  Government  by  France  (Xew  York  Times.  May  8, 
1019).  It  has  also  been  sponsored  by  Sir  George  Paish  in 
England.  Sir  George  Paish  in  a  copyrighted  interview  sent  to 
the  New  York  Trihiine  of  July  20,  1919.  by  its  London  corre- 
spondent, said  he  had  come  to  conclusion  that  "a  collapse  of 
world  credit  is  not  only  possible  but  imminent.  ...  I  see 
only  one  way  out  and  that  is  by  capital  levies,  both  national  and 
international.  I  have  made  the  suggestion  that  America  and 
England  each  agree  to  wipe  out.  say,  a  tliousand  million  [pounds 
sterling]  of  the  debts  owed  them  by  Continental  countries  and 
pool  an  international  credit  in  the  League  of  Xations.  My  sug- 
gestion is  based  on  the  principle  that  it  is  better  to  forego 
part,  thus  making  the  rest  good  than  to  force  bankruptcy  and 
thereby  receive,  say,  only  50  cents  on  the  dollar."  The  proposal 
has  also  been  endorsed  by  J.  M.  Kevnes  in  his  able  and  influ'cn- 
tial  book.  The  Economic  Consequences  of  the  Peace  (pp.  269- 
282). 

384 


PROBLEMS  OF  CUliKENCY  AND  DEBT 

ships,  and  other  forms  of  restitution,  are  shown  in  the 
following  schedule  of  reparations:^^ 

1.  To  be  issued  fortlnvith,  20,000,000,000  marks  gold  bearer 
bonds,  payable  not  later  than  May  1,  1921,  without 
interest.     .     .     . 

2.  To  be  issued  forthwith,  further  40,000,000,000  marks 
gold  bearer  bonds,  bearing  interest  at  2i/2  per  cent,  per 
annum  between '  1921  and  1926,  and  thereafter  at  five  per 
cent,  per  annum  with  an  additional  one  per  cent,  for  amortiza- 
tion beginning  in  1926  on  the  whole  amount  of  the  issue. 

3.  To  be  delivered  forthwith,  a  covering  undertaking  in 
writing  to  issue  when,  but  not  until,  the  Commission  is  satis- 
fied that  Germany  can  meet  such  interest  and  sinking  fund 
obligations,  a  further  instalment  of  40,000,000,000  marks  gold 
five  per  cent,  bearer  bonds,  the  time  and  mode  of  payment  of 
principal  and  interest  to  be  determined  by  the.  Commission. 

It  is,  of  course,  obvious  that  even  if  these  indemnity 
bonds  could  be  substituted  by  the  Governments  receiving 
them  for  their  own  obligations,  there  would  be  no  reduc- 
tion in  the  aggregate  debt,  but  merely  a  shifting  from 
the  Entente  to  the  Central  Powers.  To  the  extent  that 
the  finances  of  the  former  Governments  would  be 
benefited,  those  of  Germany  would  be  injured. 

Evidently  a  consideration  of  the  methods  thus  far 
proposed  do  not  lead  very  far  in  the  direction  of  the 
actual  payment  of  the  debt.  It  remains,  therefore,  to 
take  up  some  of  the  problems  that  present  themselves 
in  connection  with  real  debt  payment.  The  first  question 
that  may  be  raised  is  whether  the  debt  is  of  a  type  that 
lends  itself  to  repayment.  •  About  one-fifth  of  the  war 
debts  are  of  the  rente  type,  that  is,  in  the  form  of  bonds 
running  at  the  pleasure  of  the  Government  with  no 
specified  date  of  maturity.    A  debt  thrown  into  such  a 

"Peace  Treaty,  Part  VIII,  Annex  II,  Section  12(c). 

385 


WAR  COSTS  AND  THEIR  FINANCING 

form  may  fairly  be  spoken  of  as  a  perpetual  debt,  as 
there  is  no  obligation  on  the  part  of  the  Government  to 
redeem  it,  and  history  has  yet  failed  to  record  a  single 
instance  of  a  debt  of  this  type  having  been  paid  off. 
Moreover,  bonds  of  this  type  are  usually  sold  at  a  dis- 
count, and  this  was  true  of  the  French  and  Italian 
rentes.  Since  they  are  issued  under  par  at  low  rates  in 
order  to  save  interest,  the  Government  is  unwilling  to 
redeem  them  at  par.  With  the  exception  of  the  United 
States,  Australian,  and  New  Zealand  loans  and  most 
of  the  loans  of  Great  Britain  and  Canada,  every 
belligei-cnt  country  issued  its  bonds  below  par. 

On  the  whole,  it  may  be  concluded  that  the  debts  of 
most  of  the  countries  are  thrown  into  a  form  convenient 
for  refunding  or  for  payment.  Terminable  annuities,  of 
which  numbers  were  issued  by  Great  Britain  during 
the  Napoleonic  wars,  were  not  used  at  all  to  finance  the 
World  War.  Serial  bonds  were  resorted  to  only  in  the 
ease  of  part  of  four  of  the  German  loans.  Both  of  these 
forms  of  obligations  are  objectionable  during  a  struggle 
in  which  borrowing  is  going  on  continuously  and  on  a 
large  scale,  since  provision  must  be  made  for  fixed 
annual  payments  from  the  very  beginning.  They  thus 
impose  an  additional  expenditure  upon  the  Government 
at  the  very  time  when  it  is  borrowing  and  when  it  may 
be  most  inconvenient  to  make  payments.  Furthermore, 
they  are  open  to  the  objection  that  they  preclude  a 
refunding  by  which  advantage  may  be  taken  of  a 
possible  fall  in  the  rate  of  interest.  They  are,  there- 
fore, unsuited  for  use  in  time  of  war.  Still  further 
objections  may  be  made  to  the  use  of  serial  bonds  by  a 
national  Government.  A  Power  which  may  have  to 
finance  a  war  cannot  afford  to  be  hampered  by  the 
existence  of  a  debt  of  which  payment  is  compulsory.    In 

386 


PROBLEMS  OF  CURRENCY  AND  DEBT 

this  respect  the  effect  of  the  serial  bond  is  like  that  of 
the  much  over-rated  sinking-fund  policy  in  that  it  com- 
pels payment  of  the  debt  even  when  the  Government  is 
borrowing.  And  on  the  other  hand,  the  serial  bond 
prevents  more  rapid  payment  if  happily  larger  surplus 
revenues  make  such  action  possible. 

The  British  colonies  almost  without  exception  issued 
their  war  loans  in  the  form  of  straight-term  bonds. 
Bonds  of  this  kind  have  certain  advantages,  such  as 
simplicity  and  the  possibility  of  arranging  their  terms 
so  as  to  have  them  mature  like  bankers'  paper  at  dates 
convenient  for  repayment  or  refunding.  On  the  other 
hand,  they  have  the  disadvantage  that  the  bonds  of  each 
issue  fall  due  in  a  large  block  which  may  necessitate 
refunding.  The  accumulation  of  a  fund  in  advance  to 
provide  for  their  payment  either  by  a  sinking  fund  or 
by  some  other  device,  is  neither  advisable  nor  likely,  and 
an  attempt  on  the  part  of  the  Treasury  to  purchase 
them  in  the  open  market  on  any  large  scale  would  prob- 
ably have  the  effect  of  driving  up  their  price. 

The  **  optional  "  or  redeemable  bond  has  been  pre- 
ferred in  financing  the  World  War,  considerably  over 
two-thirds  of  the  debts  now  outstanding  having  been 
thrown  into  this  form.  The  optional  bond  is  an  Ameri- 
can device,  introduced  at  the  time  of  the  Civil  War. 
Although  such  a  bond  introduces  a  certain  element  of 
complexity  into  the  national  debt,  it  has  certain  decided 
merits.  Perhaps  the  most  important  of  these  is  the 
fact  that  it  furnishes  an  earnest  of  the  intention  of  the 
Government  to  attack  the  payment  or  refunding  of  the 
debt  as  promptly  as  possible,  a  provision  that  has  a 
beneficial  effect  upon  the  credit  of  the  Government.  It 
also  gives  an  earlier  control  over  the  debt  than  w^ould 
be  secured  by  the  issue  of  a  straight  long  term  bond. 

387 


WAR  COSTS  AND  THEIR  FINANCING 

The  latter  has  probably  been  the  factor  that  has  led  to 
the  selection  of  this  type  by  most  of  the  belligerent 
Governments.  With  one  exception  (the  third  French 
war  loan)  the  latest  optional  redemption  date  named  is 
1931,  and  the  great  bulk  of  the  debt  is  brought  by  this 
device  within  the  control  of  the  respective  Governments 
within  the  next  decade.  What  use  they  will  make  of 
this  opportunity  it  will  remain  for  the  future  to  show. 
It  is  possible,  of  course,  that,  if  market  conditions 
prove  favorable,  the  interest  charges  may  be  reduced 
by  refunding  the  floating  or  maturing  debt  at  lower 
rates  of  interest,  but  it  is  unlikely  that  any  considerable 
savings  can  be  effected  by  this  method  for  a  number  of 
years.  At  the  present  writing  (July,  1920)  the  move- 
ment of  interest  rates  is  still  upward. 

One  other  feature  of  the  obligations  issued  during 
this  war  may  be  mentioned.  The  United  States  and 
Canada  were  the  only  countries  that  specified  in  the 
contract  that  the  principal  and  interest  of  the  bonds 
must  be  paid  in  gold.  In  every  other  country,  conse- 
quently, the  service  of  the  debt  and  its  eventual  payment 
may  be  discharged  in  the  currency  of  that  country, 
however  depreciated  that  may  be.  Although  no  obstacle 
has  been  interposed  in  the  way  of  the  payment  of  the 
debt  by  reason  of  the  necessity  of  securing  gold,  the 
absence  of  this  provision  may  tend  to  prevent  an  early 
return  to  a  gold  basis  and  might  even  lead  some 
Governments  to  favor  further  inflation  with  a  view  to 
making  payment  easier. 

The  somewhat  belated  question  may  be  raised  at  this 
point  as  to  whether  the  Governments  of  the  world  have 
given  any  indication  that  they  wish  to  redeem  their 
debts.    In  candor  it  must  be  confessed  that  the  evidence 

388 


PROBLEMS  OF  CURRENCY  AND  DEBT 

is  slight.  The  United  States  is  the  only  country  that 
has  as  yet  established  a  sinking  fund  for  the  amortiza- 
tion of  its  entire  war  debt.  Great  Britain  has  pro- 
vided a  sinking  fund  for  the  payment  of  her  last  loan, 
which  will  finally  be  expunged  by  its  operation  in  1990. 
The  French  Government  entered  into  an  agreement  with 
the  Bank  of  France  at  the  time  of  the  extension  of  the 
latter 's  charter  by  which  the  advances  of  the  Bank  to 
the  Treasury  should  be  redeemed  at  the  rate  of  two 
per  cent,  per  annum.  Some  of  the  Governments  pro- 
vided in  the  laws  authorizing  the  bond  issues  that  the 
bonds  might  be  used  in  payment  of  certain  taxes  to 
the  Government.  To  the  extent  to  which  bonds  are 
utilized  for  this  purpose  a  retirement  of  the  debt  would 
be  effected. 

The  all  important  question  involved  in  a  discussion  of 
the  payment  of  the  war  debt  is,  after  all,  the  question, 
ca7i  the  Governments  of  Europe  pay  their  present 
debts  ?  If  the  history  of  their  past  record  in  the  matter 
of  debt  payment  be  accepted  as  a  guide  to  their  probable 
action  in  the  future,  it  may  safely  be  asserted  that  they 
will  not  pay  off  the  principal  of  these  debts.  They 
will  prefer  to  let  them  run.  The  United  States  and 
Great  Britain  alone  of  modern  nations  have  ever  been 
willing  to  reduce  their  national  indebtedness,  and  they 
alone  of  the  belligerent  states  have  made  a  beginning 
in  the  payment  of  the  debts  resulting  from  the  war. 
The  peak  of  the  United  States  gross  debt  was  reached 
on  August  31,  1919,  when  it  stood  at  $26,596,701,648 ; 
by  June  30,  1920,  it  had  been  brought  down  to 
$24,299,321,467.  This  reduction  of  $2,297,380,181  was 
due  in  part  to  the  application  of  a  huge  Treasury  bal- 
ance of  over  $1,000,000,000  which  had  been  maintained 
at  a  high  figure  during  the  war,  and  in  part  to  the  sale 

389 


WAR  COSTS  AND  THEIR  FINANCING 

of  military  supplies  in  an  amount  which  totaled 
$760,708,222  by  April  9,  1920.  The  high  point  of  the 
British  debt  seems  to  have  been  attained  on  December 
31,  1919,  when  it  stood  at  $10,395,000,000;  on 
June  30,  1920,  it  was  $39,225,000,000,  or  a  reduction 
of  $1,170,000,000,  due,  as  in  the  United  States,  to  the 
transfer  of  a  Treasury  balance,  to  the  sale  of  military 
supplies,  and  to  the  use  of  surplus  revenue. 

The  payment  of  a  debt  can  be  effected  only  by  having 
a  clear  surplus  over  expenditures.  It  is  unlikely  that  any 
of  the  European  Goyernments  will  be  able  for  many 
years  to  show  a  surplus.  They  will  be  fortunate  if  by 
the  strictest  economy  they  can  avoid  deficits.  Moreover, 
if  the  budgets  can  be  brought  into  equilibrium  and  a 
surplus  established,  a  double  pressure  will  at  once  be 
manifested  to  prevent  the  application  of  this  surplus  to 
debt  payment.  On  the  one  hand  there  will  be  a  demand 
from  the  industrial  classes  to  be  relieved  from  burden- 
some taxation,  and  on  the  other  there  will  be  a  steady 
pressure  for  the  expansion  of  governmental  functions 
and  activities.  It  is  altogether  unlikely  that  any  effort 
will  be  made  to  apply  the  revenues  of  the  state  to  a 
reduction  of  the  principal  of  the  debt. 

In  conclusion  it  may  safely  be  asserted  that  no 
reduction  in  the  aggregate  sum  of  European  indebted- 
ness will  be  effected  within  the  next  generation  or  two 
except  by  means  of  partial  repudiation  or  by  a  capital 
levy  or  other  methods  of  scaling  down  the  debt. 
Repudiation  by  name  will  undoubtedly  be  avoided,  but 
substantially  the  same  result  may  be  achieved  under 
some  other  guise.  There  is,  therefore,  little  likelihood 
of  any  real  payment  of  the  debts  of  the  European 
countries. 


390 


CHAPTER  XIII 

APTER-WAE  PROBLEMS  OP   TAXATION 

Economic  strength  of  the  leading  nations  —  The  financial  outlooiv 
in  the  United  States  —  The  situation  in  Great  Britain  —  The 
situation  in  France  and  Italy  —  Germany's  position  —  Pro- 
posed revenues  of  five  leading  nations  —  Probable  develop- 
ment of  principal  taxes. 

The  nations  of  Europe  are  faced  with  a  gigantic  and 
ahnost  insuperable  problem  in  raising  the  necessary 
revenues  to  meet  the  financial  burdens  that  have  come 
to  them  as  a  legacy  of  the  World  War.  In  estimating 
the  abilities  of  the  different  countries  to  provide  the 
necessary  revenues,  they  must  be  differentiated  sharpl^y, 
for  some  of  the  countries  have  large  reserve  strength 
and  will  undoubtedly  be  able  to  meet  their  obligations, 
whereas  others  have  probably  reached  the  limit  of  their 
capacity,  or  possibly  even  exceeded  it.  Any  estimate 
of  the  ability  of  the  different  nations  to  bring  their 
budgets  into  equilibrium  and  to  maintain  them  there 
must  take  into  account  not  merely  the  national  wealtli 
of  the  country,  but  also  the  productivity,  energy,  and 
thrift  of  the  people.  The  most  important  factors  in 
such  an  estimate  are  the  extent  of  the  undeveloped 
resources  of  a  country  and  the  degree  of  industrial 
intelligence  possessed  by  the  population.^  The  United 
States  has  both  in  large  measure;  the  people  of  Great 
Britain  and  Germany  are  intelligent  and  well-trained, 
but  few  undeveloped  resources  exist  in  either  of  these 
countries;  the  same  is  true  of  France  and  Italy,  though 

*  See  H.   C.   Adams,   The  Science  of  Finance,   p.    89. 

391 


WAR  COSTS  AND  THEIR  FINANCING 

their  workmen  must  be  rated  lower  in  industrial  capacity 
than  those  of  the  countries  just  named;  Russia  has  vast 
natural  wealth,  but  her  population  possesses  a  low  grade 
of  industrial  intelligence;  the  states  of  the  former 
Austro-Hungarian  Empire  have  neither  of  these  ele- 
ments of  industrial  progress.  The  actual  situation  in 
the  United  States  and  the  leading  European  countries 
as  shown  in  the  budgets  for  the  fiscal  year  ending  in 
1920  may  be  analyzed  with  due  consideration  of  these 
differences. 

The  expenditures  of  the  United  States  Government 
for  the  fiscal  year  ending  June  30,  1919,  exclusive  of 
disbursements  for  the  Post  Office,  amounted  to  $15,365,- 
362,742,  and  the  revenue  receipts  to  $4,647,603,852. 
The  expenditures  for  the  following  year,  exclusive  of 
public  debt  transactions,  and  on  the  basis  of  preliminary 
estimates  were  placed  by  Secretary  Glass  in  his  annual 
report  of  December,  1919,  at  $6,812,522,729,^  while  the 
receipts  were  estimated  as  follows : 

Internal   revenue    .$4,990,000,000 

Customs 275,000.000 

Sale  of  public  land 1.250,000 

Miscellaneous 841,000,000 

Total   ordinary  receipts   $6,107,450,000 

Public  debt  receipts    1,210,556.634 

Total $7,318,006,634 

"  In  the  absence  of  a  budget  system  or  of  any 
Treasury  control  of  governmental  expenditure  it  is  even 
more  difficult  to  foretell  the  expenditures  than  the 
receipts  of  the  Government."  The  receipts  from  taxa- 
tion, from  the  final  instalments  of  the  Victory  Liberty 
Loan,  and  from  further  issues  of  Treasury  certificates 

*  Report,  p.  202. 

392 


AFTER- WAR  PROBLEMS  OF  TAXATION 

of  indebtedness  would  probably  suffice,  he  thought,  to 
meet  the  needs  of  the  eoniiug  year.     He  added  :^ 

I  need  scarcely  say  that  the  realization  of  these  sangvine 
expectations  is  contingent  upon  the  i)ractice  of  the  most 
rigid  economy  by  the  Government  and  the  continuance  of 
ample  revenues  from  taxation.  Such  a  course,  accompanied 
b}^  the  practice  of  sober  economy  and  wise  investment  by 
our  people  and  strict  avoidance  of  waste  and  speculation, 
will  make  it  possible  for  the  American  people  to  respond 
to  the  demands  to  be  made  upon  them  privately  for  capital 
and  credit  bj^  the  nations  of  Europe. 

The  actual  transactions  of  the  Treasury  for  the  fiscal 
year  ending  June  30,  1920,  as  shown  by  the  Treasury 
statement  of  that  date,  were  receipts  of  $6,694,565,389 
and  expenditures  of  $6,766,4-i4,461,  with  a  resulting 
deficit  of  $71,879,072.  For  the  year  1921  the  total 
receipts,  excluding  public-debt  receipts,  were  estimated 
by  Secretary  Glass*  in  his  annual  report  of  1919  at 
$5,420,000,000  and  the  expenditures  at  $3,535,997,985. 
As  these  estimates  were  made  eight  months  before  the 
beginning  of  the  fiscal  year  to  which  they  apply  and  do 
not  include  such  items  as  the  Government's  payments 
to  the  railroads,  little  dependence  can  be  placed  upon 
them,  especially  on  the  side  of  expenditures.  It  is  alto- 
gether probable,  however,  that,  unless  unforeseen  appro- 
priations should  be  made,  the  Government  will  hereafter 
be  able  to  meet  its  current  expenditures  out  of  its  cur- 
rent income  and  even  to  apply  a  surplus  to  the  reduction 
of  the  floating  debt.  . 

In  the  case  of  Great  Britain  it  will  probably  suffice 

to  contrast  the  last  peace  budget  for  the  year  ending 

'  Letter   of  July  25   to  banks   and   trust  companies,  quoted   in 
Federal  Reserve  Bulletin,  August,  1919,  p.  726. 
*  Report,  p.  204. 

393 


WAR  COSTS  AND  THEIR  FINANCING 

March  31,  1914,  with  the  budget  passed  for  the  year  end- 
ing March  31,  1920.  In  the  "former  the  civil  budget 
amounted  to  $8  G4,9  64,845  and  interest  payments, 
including  sinking-fund  payments,  to  $122,500,000, 
giving  total  expenditures  of  $987,464,845.  Against 
this  the  revenues  amounted  to  $991,214,250,  yielding 
a  surplus  of  almost  $4,000,000.  The  budget  for 
1920  stands  in  striking  contrast  to  this.  The  total 
expenditures  proved  to  be  some  $8,328,865,000,  of 
which  the  interest  on  the  debt  accounts  for  $1,800,- 
000,000.  The  remaining  $6,500,000,000  was  about 
equally  divided  between  civil  and  war  expenditures. 
Against  this  enormous  total  there  were  received  revenues 
amounting  to  $5,697,855,000,  to  which  an  additional 
$1,000,000,000  was  added  from  the  sale  of  assets.  This 
left  a  deficit  of  $1,631,010,000,  which  it  was  proposed 
to  meet  by  further  borrowing.  For  this  purpose  a  new 
loan  of  $1,250,000,000  was  voted  by  Parliament.  It  will 
be  noticed  that  the  interest  payments  now  amount  to 
more  than  double  the  total  civil  budget  before  the  war, 
in  addition  to  which  the  civil  budget  itself  has  been 
enormously  swollen  by  pensions  and  added  costs,  such 
as  the  civil  service  bonus  (of  $20,000,000),  the  loans 
to  Allies  ($140,000,000),  liabilities  "  in  respect  of  coal  " 
($100,000,000),  unemployment  benefit  ($40,000,000), 
etc.  Even  if  it  could  be  assumed  that  as  a  result  of 
universal  disarmament  all  military  and  naval  expendi- 
tures would  be  at  once  discontinued.  Great  Britain  would 
be  left  with  a  heavy  burden  as  a  result  of  the  war.  To 
meet  these  growing  expenditures  taxes  have  been 
imposed  which  before  the  war  would  have  been  regarded 
as  unbearable.  They  rest  now  with  oppressive  weight 
on  wealth  and  large  incomes,  the  latter  being  taxed  in 
certain  circumstances  as  high  as  67  per  cent. 

394 


AFTER-WAR  PROBLEMS  OF  TAXATION. 

The  budget  for  1920-21  makes  a  much  better  showing 
and  evidences  the  extent  of  Gri^at  Britain's  financial 
recovery  within  the  previous  year.  Expenditures  are 
estimated  at  $5,920,510,000  and  reviniues  at  $7,091,- 
500,000,  which  is  a  distinct  improvement  over  1920  on 
both  sides  of  the  budget.  If  this  plan  is  carried  through 
there  will  be  available  for  reduction  of  the  debt  the  sum 
of  $1,170,990,000.  To  obtain  this  favorable  balance  Mr. 
Chamberlain  proi)ost>d  to  increase  the  postal  and  tele- 
phone rates,  to  raise  the  duties  on  spirits,  beer,  and 
Avines,  and  on  cigars,  and  to  double  tlie  stamp  duties  on 
transfers  and  bearer  securities,  and  on  ordinary  receipts. 
The  income  tax  was  left  unchanged  at  6s.  in  the  pound, 
but  the  excess  profits  tax  was  raised  from  40  to  60  per 
cent.,  although  its  abolition  had  been  hoped  for.  The 
Chancellor  offered,  however,  to  leave  the  tax  at  its  old 
figure  if  Parliament  would  impose  a  special  levy  on  war 
wealth.^  From  all  these  sources  additional  revenues  of 
$383,250,000  might  be  expected. 

This  will  constitute  a  heavy  burden,  but  not  necessarily 
an  unbearable  one.  New  powers  of  productive  efficiency 
have  been  developed  among  the  British  people  during 
the  war,  and  the  ability  to  produce  certain  kinds  of 
goods  and  to  meet  foreign  competition  in  competitive 
markets  has  probably  been  heightened.  INIuch  depends 
upon  the  solution  of  labor  difficulties,  but  it  may  be 
assumed  that  proper  steps  will  be  taken  to  meet  the 
legitimate  demands  of  the  working  classes.  If  the 
morale  and  spirit  of  the  nation  is  sustained,  there  is  no 
reason  to  doubt  the  ability  of  the  British  people  to  carry 
the  present  load  of  charges  on  the  foreign  debt  and  of 
expanded  governmental  activities. 

It  is  difficult  to  present  an  accurate  statement  of  the 

"■The  Round  Table,  June,  1920.  p.  626. 

395 


WAR  COSTS  AND  THEIR  FINANCING 

French  situation  since  matters  are  in  tiux  to  such  a 
degree  that  estimates  change  almost  from  day  to  day. 
The  total  ordinary  expenditures  for  the  year  1919  were 
about  $3,700,000,000.<'  More  than  half  of  this  amount 
represents  the  interest  charge  on  the  debt,  which  it  is 
estimated  will  amount  to  $2,000,000,000  yearly,  includ- 
ing $100,000,000  for  payments  to  the  Bank  of  France 
for  the  redemption  of  the  redundant  bank  notes.  The 
Government  expressed  the  hope  that  these  payments 
might  soon  be  raised  to  $150,000,000  a  year.  The  debt, 
however,  is  steadily  increasing,  owing  to  the  delay  in 
imposing  adequate  taxation;  it  amounted  on  February 
1,  1919,  to  $35,000,000,000,  and  has  now  reached  over 
$46,000,000,000  with  no  certainty  that  its  growth  has 
been  finally  checked. 

The  budget  for  1920  as  adopted  amounts  to  $9,764,- 
200,000,  but  the  expenditure  is  divided  into  tliree  sec- 
tions: (1)  the  ordinary  budget  comprising  the  normal 
expenditure  of  the  state  of  $3,864,200,000;  (2)  the 
extraordinary  budget,  consisting  of  exceptional  expendi- 
ture resulting  from  the  war  of  $700,000,000;  (3)  a 
budget  comprising  the  expenditure  recoverable  from 
the  enemy  under  the  Peace  Treaty,  amounting  to 
$5,200,000,000.  Existing  taxes  and  other  revenue 
receipts  are  expected  to  yield  $2,144,800,000,  leaving  a 
deficit  of  $7,619,400,000.  But  to  this  must  be  added 
additional  expenses  for  special  services  of  $900,000,000, 
and  a  further  sum  of  $750,000,000  for  repaying  short 
time  foreign  loans  falling  due,  notably  the  Anglo- 
French  loan  in  the  United  States.  Thus  the  total  deficit 
is  brought  up  to  over  $9,000,000,000.     This  sum  must 

'  See  M.  Ribot's  speech  before  the  Chamber  of  Deputies,  Journal 
Officiel,  May  30-31,  1919,  and  the  tax  proposals  of  M.  Klotz  as 
reported  in  the  Economist   (London)    June  7,  1919. 

396 


AFTER- WAR  PROBLEMS  OF  TAXATION 

come  from  fresh  taxes,  new  loans,  liquidation  of  war 
stocks,  and  payment  of  indemnities  by  Germany  and 
her  allies/ 

From  new  taxes  it  is  hoped  to  obtain  $1,719,400,000 
and  from  the  sale  of  army  supplies  $700,000,000,  which 
together  with  existing  revenues,  will  produce  total 
receipts  of  $4,564,200,000.  It  is  also  hoped  to  effect 
additional  economies  in  expenditure  amounting  to 
$1,600,000,000.  But  even  if  all  these  proposals  are 
realized,  there  will  still  remain  a  deficit  of  more  than 
$3,600,000,000  to  be  met  out  of  further  loans  and  Ger- 
man indemnity  payments.  It  is  evident  from  this  expo- 
sition how  dependent  French  finances  are  upon  this  last 
named  source. 

The  new  taxes  introduced  in  1919  consisted  of 
increased  duties  on  wines,  coffee,  sugar,  mineral  water, 
and  taxes  on  gas  and  electricity;  increases  were  also 
made  in  the  taxes  on  tobacco,  matches,  succession  duties, 
registration  duties,  and  special  taxes  were  imposed  on 
incomes  and  war  profits.  A  state  monopoly  of  petrol 
and  petroleum  was  also  established.  For  1920  the 
Finance  Committee  of  the  Chamber  of  Deputies  pro- 
pose to  increase  the  rate  of  the  impots  cedulaires  on 
income  and  industrial  profits,  to  raise  the  maximum  rate 
of  the  general  income  tax  from  20  to  40  per  cent.,  and 
to  establish  a  super  tax  of  10  per  cent,  for  bachelors; 
but  on  the  other  hand,  they  plan  to  raise  the  exemption 
minimum  of  the  general  income  tax  from  $600  to  $1200 
and  to  increase  the  exemptions  for  children.  The 
total  yield  from  direct  taxes  is  estimated  at  $276,000,- 
000.  Increases  are  recommended  in  the  stamp  duty  on 
sales,  shooting  licenses,  etc.,  in  the  taxes  on  alcohol, 
liquors,  beer,  cider,  and  wines,  on  playing  cards  and 

'Economic  World,  Julv  24,  1020,  p.  127.  * 

397 


WAR  COSTS  AND  THEIR  FINANCING 

public  amusements,  and  new  duties  are  levied  on  public 
conveyances  and  private  motors,  coffee,  tea,  chocolate, 
chicory,  glucose  etc.  The  aggregate  yield  of  these 
increases  in  indirect  taxes  is  given  as  $407,000,000.  The 
balance  of  $1,000,000,000,  to  make  up  the  total  of 
$1,700,000,000  from  new  taxation,  it  is  hoped  to  obtain 
from  a  tax  on  turnover  at  the  rate  of  one  per  cent,  on 
ordinary  transactions  and  of  10  per  cent,  on  articles 
of  luxury.  This  program  thus  calls  for  loans  amount- 
ing to  about  $3,000,000,000.  Subscriptions  to  the  i-ecent 
loan  totaled  $3,126,000,000,  of  which,  however,  only 
$1,360,000,000  was  in  new  money,  the  balance  being  in 
Government  securities.^ 

One  of  the  weaknesses  of  the  French  revenue  system 
has  been  a  disinclination  on  the  part  of  the  French 
people  to  submit  to  direct  taxes.  Even  during  the  war 
most  of  the  taxes  were  indirect,  the  income  tax  not 
being  levied  until  1916,  and  then  only  at  very  low 
rates  and  with  very  high  exemptions.  Moreover,  after 
the  introduction  of  the  income  tax,  there  was  consider- 
able delay  and  evasion.^  Before  revenues  can  be  made 
to  equal  expenditures  it  will  be  necessary  to  apply  a 
drastic  and  far-reaching  system  of  direct  taxation. 

^Federal  Reserve  Bulletin,  May,  1920,  p.  491. 

"  The  following  sentences  from  M.  Ribot's  speech  of  IMay  30, 
1919,  already  alkided  to.  throw  a  vivid  light  upon  the  situation: 
"Why  does  not  the  Minister  ask  more  of  the  direct  tax?  The 
cause  of  this  is  sad  enough  .  .  .  the  cause  is  that  the  adminis- 
tration for  direct  taxation  is  not  capable  of  filling  the  part  which 
events  have  imposed  upon  it.  .  .  .  The  disorder  is  excessive; 
the  treasury  losses  billions.  Xote  also  the  delay.  In  March  and 
April  we  received  bills  for  the  general  income  tax  founded  on  the 
basis  of  the  1917  income.  We  are  late  by  a  year.  The  question 
of  exemption  must  also  be  settled  and  workmen  made  to  pay 
their  income  taxes.  .  .  .  Agricultural  profits  are  not  taxed  — 
it  is  scandalous.  .  .  .  The  Minister  of  Finance  hesitates 
to  increase  direct  taxes,  but  taxes  on  wealth  and  income  miist  be 
increased." 

398 


AFTER- WAR  PROBLEMS  OF  TAXATION 

Assuming  that  the  increase  in  the  debt  measures  the 
destruction  and  waste  of  capital  during  the  war,  it  is 
clear  that  the  enormous  revenues  required  by  the  present 
budget  must  be  obtained  from  a  smaller  taxable  base. 
The  destruction  of  property  in  France  has  been  esti- 
mated at  $10,000,000,000,  to  which  may  be  added 
another  $4,000,000,000  for  shipping  and  cargoes.^" 
Large  investments  in  Russia  and  Turkey,  amounting 
possibly  to  $5,000,000,000,  are  temporarily  nonproduc- 
tive and  probably  worthless,  and  those  in  Rumania  and 
Mexico  have  lost  considerably  in  value."  To  replace 
the  wasted  capital  and  provide  for  further  needs,  both 
private  and  governmental,  will  require  the  sacrifice  of 
everything  nonessential  and  possibly  even  a  reduction 
in  the  standard  of  living.  The  question  of  national 
solvency  seems  to  be  reduced  to  one  of  willingness  to 
submit  to  heavier  taxation. 

According  to  a  statement  by  S.  Nitti,  the  Italian 
Prime  Minister,^-  the  total  Italian  debt  now  amounts  to 
$18,758,000,000,  on  which  the  annual  interest  charge  may 
be  placed  at  not  less  than  $900,000,000.  The  expendi- 
tures for  the  civil  service  liave  trebled  and  are  estimated 
for  the  year  1920  at  $1,000,000,000.  Other  expendi- 
tures, including  $150,000,000  for  war  liquidation  pur- 
poses, are  expected  to  bring  up  the  total  annual  outlay 
to  about  $2,000,000,000.  Against  these  expenditures  the 
total  receipts  of  the  year  1920  were  estimated  at 
$1,800,000,000.  For  the  fiscal  year  1921  the  expendi- 
tures are  estimated  at  $1,900,000,000,  exclusiA'e  of  inter- 
est on  the  foreign  debt  or  wage  increases,  while  receipts 

^o  See  mv  "  Direct  and  Indirect  Costs  of  the  Great  World  War  " 
(Washington,  1010),  pp.  2S5.  280,  200. 

"Most  of  the  foreign  investments  of  French  citizens  have  been 
made  in  these  four  countries. 

^•Federal  Reserve  Bulletin,  May.  1020,  p.  489. 

39'9 


WAR  COSTS  AND  THEIR  FINANCING 

are  put  at  $1,500,000,000,  tlius  leaving  a  deficit  of 
$-400,000,000  on  incomplete  returns. 

The  wide  discrepancy  between  receipts  and  expendi- 
tures existing  in  1919  and  1920  showed  the  need  of 
radical  tax  reform.  Accordingly  a  series  of  Royal 
decrees  dated  November,  1919,  put  a  new  system  of  tax- 
ation into  effet  from  January  1,  1920.  Formerly  taxes 
were  levied  mainly  upon  land,  buildings,  and  private 
incomes,  but  according  to  the  new  law  capital,  both 
normal  and  due  to  war  profits,  is  also  taxed.  The 
original  plan  w^as  to  impose  a  capital  levy,  but  in  view 
of  the  stormy  opposition  which  this  aroused,  it  was 
modified  to  a  compulsory  loan  at  a  nominal  rate  of  inter- 
est. This  in  turn  gave  place  to  the  present  scheme  of 
a  five  per  cent,  voluntary  loan  and  a  tax  on  capital. 
The  loan  has  already  brought  in  some  $4,000,000,000, 
which  is  to  be  applied  immediately  to  the  refunding  of 
the  floating  debt  and  the  retirement  of  some  of  the  bank 
notes  issued  on  account  of  the  state. 

Tlie  taxes  provided  for  under  the  new  system  consist 
of  the  following:  (1)  an  extraordinary  tax  on  capital, 
Avhicli  again  is  made  up  of  (a)  a  tax  on  the  increase 
in  wealth  due  to  the  war,  and  (b)  a  tax  on  the  original 
fortune  existing  prior  to  the  war.  Both  of  these  are 
progressive,  the  rates  of  the  first  ranging  from  10  per 
cent,  on  $4,000  to  60  per  cent,  on  the  largest  fortunes, 
while  the  rates  of  the  second  run  from  4.5  per  cent,  on 
$10,000  to  50  per  cent,  on  $20,000,000;  in  the  latter 
case  the  tax  may  be  paid  in  annual  installments  over  a 
period  of  20  years.  (2)  By  decree  of  November  24, 
1919,  the  taxes  on  land  and  buildings,  the  special  war 
tax  on  incomes,  the  personal  war  tax,  etc.,  were  abol- 
ished and  in  their  place  were  established  a  normal  tax 
on  incomes  and  a  supplementary  tax  on  total  income, 

400 


AFTER- WAR  PROBLEMS  OF  TAXATION 

the  latter  applying  only  to  individuals  with  incomes 
above  $900,  at  rates  ranging  from  1  to  25  per  cent. 
These  two  taxes  do  not  go  into  effect  until  January  1, 
1921.  (3)  Supplementary  taxes  are  revised  so  as  to 
make  them  more  productive,  the  rates  being  raised  in 
case  of  taxes  on  registration,  mortgages,  government 
concessions,  mortmain,  insurance  policies,  bicycles,  auto- 
mobiles, and  inheritances.  New  taxes  are  imposed  upon 
the  sales  of  articles  of  luxury  and  of  common  use,  and 
upon  mineral  waters." 

During  the  course  of  the  war  taxes  and  other  revenues 
in  Italy  were  gradually  screwed  up  to  the  top  notch 
and  now  rest  upon  every  conceivable  commodity,  trans- 
action, and  form  of  realized  wealth.  Some  of  these  are 
purely  war  measures  and  temporary  in  their  nature 
and  will  disappear,  while  the  desire  to  protect  native 
industries  will  act  to  keep  down  or  reduce  customs 
revenues.  A  difficult,  if  not  insoluble,  problem  is  pre- 
sented to  Italy  of  bringing  her  swollen  expenditures 
and  her  revenues  into  equilibrium.  The  burden  of  taxa- 
tion upon  the  Italian  people  is  already  crushing,  and 
it  is  scarcely  conceivable  that  much  more  can  be  raised 
from  this  source.  The  fiscal  situation  is  aggravated  by 
a  greatly  depreciated  currency  and  unfavorable  rates 
of  foreign  exchange,  both  of  which  impose  an  additional 
burden  upon  Italy  in  meeting  her  foreign  obligations. 
At  the  same  time  the  stoppage  of  the  tourist  traffic  and 
the  decline  of  remittances  from  emigrants,  of  whom 
about  1,200,000  were  recalled  as  reservists,  as  well  as 
the  falling  off  of  the  export  trade,  reduced  the  national 
income  at  the  very  time  that  expenditures  were  growing. 

^^  The  Great  Fiscal  Reform  and  ReJiahiUtafion  of  Italian 
Finances,  1020.  Tssiiod  by  the  Office  of  Italian  Minister  Pleni- 
potentiary, 291  Broadway,  New  York  City. 

401 


WAR  COSTS  AND  THEIR  FINANCING 

A  considerable  period  will  elapse  before  any  one  of 
these  factors  will  reach  pre-war  proportions,  and  in  the 
interval  it  is  difficult  to  see  how  the  Government  can 
maintain  its  normal  functions  and  carry  the  burden 
of  the  interest  on  the  war  debt,  war  pensions,  and  other 
charges  incidental  to  the  war  without  continued  resort 
to  credit. 

The  financial  situation  of  Germany  was  set  forth 
candidly  and  in  detail  for  the  first  time  since  the  out- 
break of  the  war  by  Dr.  Schiffer,  Minister  of  Finance, 
in  a  memorandum  presented  to  the  National  Assembly 
at  Weimar  in  February,  1919.^^  Dr.  Schiffer  estimated 
that  the  national  annual  expenditures  for  the  future 
civil  budget  and  debt  charges  would  be  $2,500,000,000, 
as  compared  with  $900,000,000  before  the  war.  The 
annual  expenditures  of  the  states  and  the  communes 
would  be  about  $1,250,000,000,  as  compared  with  $750,- 
000,000  before  the  war,  the  difference  measuring  the  war 
burden  imposed  upon  the  local  units.  The  total  amount 
of  revenue  to  be  raised  by  taxation  in  the  future  would 
therefore  be  $3,750,000,000,  as  against  $1,050,000,000 
before  the  war.  In  July,  1919,  Mathias  Erzberger,  the 
new  Minister  of  Finance,  raised  these  estimates  consider- 
ably, and  at  the  same  time  vigorously  attacked  the  prob- 
lem of  raising  the  necessary  revenues.  Tax  proposals 
of  the  most  drastic  and  thorough-going  character  were 
submitted  by  him  and  finally  adopted  by  the  National 
Assembly.  Some  of  these  went  into  effect  at  once  and 
others  did  not  become  effective  until  1920;  some  were 
permanent  and  others  non-recurrent,  so  that  it  is  dif- 
ficult to  estimate  their  revenue-producing  character. 
The  following  were  the  principal  new  taxes  :^* 

"  T'o.ss/sc/ie  Zeifung,  February  IG,  1919. 
^*  Berliner  Tageblatt,  April  25,  1920. 

402 


AFTER- WAR  PROBLEMS  OF  TAXATION 

(1)  A  war  tax  on  the  increase  of  wealth  during  the 
war,  at  rates  ranging  from  10  per  cent,  on  $2,500  to 
100  per  cent,  on  the  excess  over  $100,000,  witli  an  initial 
exemption  of  $2,500  and  various  deductions,  effective 
September  26,  1919. 

(2)  An  extraordinary  war  tax  for  the  year  1919  on 
the  excess  of  income  in  1919  over  that  of  1914,  at  rates 
varying  from  5  per  cent,  on  the  first  $2,500  to  80  per 
cent,  on  $750,000.     Effective  September  10,  1919. 

Either  of  these  taxes  may  be  paid  with  government 
bonds. 

(3)  The  inheritance  tax  is  made  more  severe,  being 
levied  both  upon  inheritances  and  upon  donations  to 
living  persons,  but  fairly  liberal  exemptions  exist.  The 
rates  progress  according  to  both  size  of  fortune  and 
degree  of  relationship,  ranging  from  1  per  cent,  on  small 
estates  to  near  relatives  to  90  per  cent,  on  large  for- 
tunes to  distant  heirs.     Effective  September  1,  1919. 

(4)  Emergency  sacrifice  tax.  This  is  a  heavy  non- 
recurring tax  upon  the  total  real  and  personal  property 
of  all  persons  and  corporations  according  to  their  assess- 
ment of   December  31,   1919.     Exemption  is  made  of 

$1,250  for  a  man  and  in  the  case  of  a  married  man  of  an 
equal  additional  sum  for  wife  and  each  child  after  the 
first.  The  rates  progress  from  10  to  65  per  cent.,  but 
payment  may  be  spread  by  annual  installments  over  a 
period  of  32  to  50  years.    Effective  January  14,  1920.^^ 

(5)  Imperial  income  tax,  which  now  replaces  all  for- 
mer state  and  municipal  income  taxes,  these  latter  gov- 
ernments sharing  in  the  revenues.  Effective  April  14, 
1920. 

"  It  is  estimated  that  there  is  in  Germany  from  $67,500,000,000 
to  $70,000,000,000  worth  of  property  whi'di  will  be  suhject  to 
this  tax;  and  it  is  calculated  that  the  Government  will  realize 
from  this  source  in  1920  about  $562,500,000. 

403 


WAR  COSTS  AND  THEIR  FINANCING 

(6)  Corporation  tax.  This  is  the  income  tax  applied 
to  corporations.     Effective  April  15,  1920. 

(7)  Tax  of  10  per  cent,  on  the  proceeds  of  capital, 
tliat  is  upon  returns  from  foreign  investments,  and  on 
domestic  dividends,  interest,  royalties,  etc.  Effective 
March  31,  1920. 

(8)  A  property  tax  on  the  increase  of  wealth,  cal- 
culated at  intervals  of  three  years.  The  rates  are  from 
1  to  10  per  cent.,  with  exemptions  of  a  present  for- 
tune of  less  than  $5,000  and  an  increment  of  less  than 
$1,250.    Effective  April  21,  1920. 

From  these  various  sources  it  is  hoped  to  obtain 
for  the  present  fiscal  year  revenues  amounting  to 
$3,450,000,000;  the  customs  duties  are  relied  upon  for 
$2,275,000,000,  while  $250,000,000  are  expected  from 
tobacco  taxes  and  as  much  more  from  the  new  export 
duties.  Altogether  total  revenues  of  about  $6,250,- 
000,000  are  estimated.  Against  this  the  expenditures 
are  reckoned  at  $6,987,500,000,  of  which  interest  on  the 
public  debt  makes  up  almost  half  or  $3,100,000,000. 
But  this  is  only  the  ordinary  budget.  In  addition  Dr. 
Wirth,  the  Minister  of  Finance,  has  submitted  an  extra- 
ordinary budget  of  $2,900,000,000,  which,  however,  does 
not  include  the  deficit  of  $3,225,000,000  attributable  to 
the  postal  and  railway  administration.  It  does  include 
a  sum  of  $1,000,000,000  for  the  execution  of  the  Peace 
Treaty,  but  any  amounts  in  excess  of  this  which  Ger- 
many may  be  compelled  to  pay  will  call  for  the  raising 
of  additional  revenues.^*' 

Drastic  as  are  these  levies,  it  is  clear  that  they  will 
have  to  be  not  only  continued  but  increased  if  budgetary 
equilibrium  is  to  be  at  all  maintained.  In  spite  of 
the  enormous  burden  which  will  thereby  be  imposed 

"  Industrie  und  Handelszeitung,  April  21,  1920. 

404 


AFTER- WAR  PROBLEMS  OF  TAXATION 

upon  the  German  people,  there  is  reason  to  believe  that 
their  industrial  intelligence,  their  habits  of  industry  and 
thrift,  and  their  national  tenacity  will  enal)le  them  to 
assume  and  carr}^  this  burden.  It  will  involve  a  sacrifice 
of  all  nonessentials,  a  probable  virtual  confiscation  of 
all  large  fortunes,  and  possibly  a  temporary  suspi^nsion 
of  the  interest  payments  to  holders  of  the  domestic 
debt,  but  ultimately  even  these  charges  will  probably  be 
met. 

An  effort  is  made  in  the  following  table  to  present 
for  the  leading  nations  the  relation  of  present  revenues 
and  expenditures  to  pre-war  revenues  and  expenditures, 
their  relative  increase,  and  the  per  capita  burden  they 
constitute : 

Pre-War  and  Post-War  Revenues  and  Expenditures 


Per  cent. 

Per  cent. 

Per  cent. 

growth  of 

gro^\i;h  of 

which 

Present 

present 

present 

present 

revenue 

over 

over  pre- 

revenues are 

per 

pre-war 

war  ex- 

of present 

capita 

revenue 

penditures 

expenditures 

United  States. . .  . 

540 

547 

99 

$65 

United  Ivingdom. 

474 

743 

68 

120 

France 

158 
185 
684 

801 

539 

1,601 

22 
45 
63 

51 

Italy 

51 

Germany 

91 

The  United  States,  Germany,  and  Great  Britain  have 
increased  their  revenues  over  those  of  the  pre-war  period 
the  most,  but  the  increase  in  the  last-named  country 
has  involved  the  greatest  effort  and  has  absorbed  the 

405 


WAR  COSTS  AND  THEIR  FINANCING 

largest  proportion  of  the  national  income,  amounting, 
indeed,  to  two-fifths  of  the  pre-war  income.  How  heavy 
this  burden  is,  and  how  much  greater  than  that  of  any- 
other  country,  is  shown  by  the  column  of  per  capita 
revenues.  Although  the  United  States  shows  the  greatest 
relative  increase  in  taxes,  they  constitute  a  relatively 
lighter  burden  upon  the  people  than  do  those  of  Great 
Britain  by  whatever  standard  they  are  measured.  There 
is  still  considerable  financial  power  that  could  be  taken 
up  in  further  Government  exactions  or  that  may  be 
devoted  by  private  initiative  to  the  rehabilitation  and 
reconstruction  of  the  European  countries. 

France  succeeded  in  increasing  her  taxes'over  those  of 
the  pre-war  revenues  less  than  any  other  country,  and 
the  per  capita  charge  to-day  is  the  least  of  those  shown 
in  the  table.  The  record  of  Italy  is  only  slightly  bet- 
ter than  that  of  France,  judged  by  this  standard.  If, 
however,  the  third  column,  showing  the  percentage 
growth  of  present  over  pre-war  expenditures  be  made 
the  basis  of  comparison,  it  is  evident  that  the  growth 
of  expenditures  in  all  countries  has  proceeded  much 
more  rapidly  than  that  of  revenue.  The  explanation  of 
the  present  deficits  is  to  be  found  in  this  fact.  Until 
those  swollen  outlays  can  be  reduced,  there  is  little  likeli- 
hood of  securing  equilibrium  in  the  budgets.  The  insuf- 
ficiency of  the  existing  revenues  to  meet  expenditures 
for  the  year  1920  is  clearly  shown  in  the  fourth  column, 
though  this  has  already  been  corrected  in  the  ease  of 
the  two  first  countries  for  the  budget  of  1921. 

Germany,  in  spite  of  her  misguided  financial  policy 
during  the  war,  has  applied  herself  seriously  to  the  task 
in  hand  and  is  proposing  greatly  to  increase  her  taxa- 
tion. Judged  by  what  Great  Britain  has  done,  she  has 
by  no  means  reached  the  limit  of  her  capacity  as  yet, 

406 


AFTER- WAR  PROBLP]MS  OF  TAXATION 

and  should  be  able  to  carry  still  heavier  burdens.  In 
fact,  the  taxes  could  be  made  about  30  per  cent,  heavier 
than  they  now  are  before  the  per  capita  burden 
would  be  as  heavy  r.s  that  borne  by  the  British. 

That  taxation  will  necessarily  be  heavier  and  that 
these  charges  will  continue  for  many  years,  is  evident. 
The  character  and  incidence  of  the  taxes  to  be  levied 
is  therefore  a  question  of  paramount  importance. 
Although  it  is  too  early  to  say  definitely  just  how  the 
different  countries  will  order  their  systems  of  taxation, 
certain  general  principles  stand  out  with  sufficient 
definiteness  to  permit  their  statement. 

Those  countries  that  made  the  greatest  use  of  taxation 
during  the  war  were  the  ones  that  were  able  to  develop 
direct  taxes  quickly  and  effectively.  Great  Britain  was 
the  only  country  that  in  1914  had  a  well  organized 
system  of  direct  taxation.  There  the  income  tax  was 
normally  used  to  meet  new  demands  and  was  easily 
expanded.  During  the  war  this  tax,  together  with  the 
inheritance  and  excess  profits  taxes,  formed  the  sheet- 
anchor  of  the  Exchequer,  about  two-thirds  of  the  total 
revenue  being  derived  from  these  sources.  The  United 
States  was  saA'ed  by  a  hair's  breadth  from  the  fate  that 
befell  the  other  countries  that  relied  chiefly  upon  indirect 
taxes  for  their  revenues.  Onl}'-  in  1913  was  the  income 
tax  made  a  constitutional  possibility.  It  is  difficult  to 
think  how  the  Federal  Government  would  have  financed 
its  enormous  war  expenditures  without  the  income  tax 
and  its  twin,  the  excess  profits  tax.  There  was  a  rapid 
development  in  these  two  taxes  and  in  the  inheritance 
tax,  even  in  the  years  preceding  the  entrance  of  the 
United  States  into  the  war,  and  after  that  event  they 
became  the  very  backbone  of  the  re\Tnue  system.    There 

407 


WAR  COSTS  AND  THEIR  FINANCING 

is  no  reason  to  suppose  that  these  taxes,  which  proved 
so  lucrative  and,  on  the  whole,  equitable  during  the 
war  will  not  continue  for  a  time  to  be  used  to  supply 
the  tax  revenues,  scarcely  less  in  amount,  that  peace  de- 
mands in  these  two  countries,  though  the  opposition  to 
the  excess  profits  tax  will  probably  result  in  its  gradual 
modification  if  not  elimination. 

The  other  countries  depended  for  the  most  part  on 
indirect  taxes.  In  France  there  has  always  been  a  dis- 
inclination on  the  part  of  the  taxpayers  to  submit  to 
direct  taxes.  The  income  tax  itself  was  first  introduced 
during  the  war.  Although  Italy  had  an  income  tax 
before  the  war,  it  relied  for  the  additional  revenues 
during  the  struggle  upon  a  multitude  of  indirect 
exactions.  In  Germany  the  income  tax,  as  well  as  other 
direct  taxes,  belonged  to  the  separate  states,  and  the 
revenues  of  the  Imperial  Government  were  derived  for 
the  most  part  from  customs  duties  and  other  indirect 
taxes.  The  disadvantages  of  this  system  were  recognized, 
and  it  would  undoubtedly  have  been  reorganized  in  a 
few  years ;  but  this  distribution  of  the  sources  of  revenue 
was  a  decided  weakness  in  a  military  state  like  Germany 
and  was  responsible  for  some  of  the  weaknesses  of  her 
excessive  loan  policy  during  the  war.  As  foreign  trade 
was  disorganized  in  all  the  European  countries,  but  little 
dependence  could  be  placed  upon  the  returns  from  cus- 
toms, and  to  make  good  this  deficit  the  Governments 
were  forced  to  resort  to  a  multitude  of  excise  and 
consumption  taxes.  One  of  the  striking  features  of  war 
finance  was  the  slight  importance  of  customs  duties  as  a 
source  of  governmental  revenue;  in  those  countries 
where  they  increased,  as  in  France,  the  growth  was  of 
no  fiscal  significance,  for  it  resulted  from  the  enlarged 
purchase  of  war  supplies  on  Government  account. 

408 


AFTER- WAR  PROBLEMS  OF  TAXATION 

Certain  marked  tendencies  in  direct  taxation  were 
developed  during  the  war.  In  tiie  first  place,  heavier 
burdens  were  placed  upon  realized  wealth  than  had  ever 
been  dreamed  of  before.  There  w^as  also  a  great  develop- 
ment of  the  principle  of  progression,  and  rates  were 
raised  to  unheard-of  heights.  The  rates  of  the  income 
tax  reached  77  per  cent,  in  the  United  States;  and  in 
Great  Britain  47^/2  per  cent.  The  highest  rates,  how- 
ever, were  levied  not  unnaturally  in  the  war  profits  and 
excess  profits  taxes,  these  reaching  80  per  cent,  in  the 
United  States  and  Great  Britain  and  60  per  cent,  in 
France  and  Italy.  This  tax  was  remarkable  not  only 
for  the  height  of  the  rates  and  the  large  yields  obtained, 
but  also  for  its  universality.  By  the  end  of  the  war  it 
was  to  be  found  in  practically  every  European  country, 
neutral  as  well  as  belligerent. 

The  inheritance  tax  was  the  third  of  the  three 
important  instruments  of  direct  taxation.  A  moderate 
use  of  this  tax  had  been  made  before  the  war,  but  it 
remained  for  the  necessities  of  the  great  struggle  to 
bring  about  its  real  development.  Before  the  war  the 
highest  rate  imposed  in  any  country  in  the  world  was 
25  per  cent.,  but  Germany  in  her  recent  tax  proposals 
has  shown  the  extent  to  which  this  method  can  be 
developed;  according  to  these  a  tax  of  90  per  cent,  will 
be  imposed  upon  large  amounts  going  to  distant  heirs. 
There  is  every  reason  to  expect  that  large  use  will  be 
made  in  other  countries  of  this  source  of  revenue  in 
post-war  finance.  Indeed,  as  a  tax  for  the  payment  of 
the  debt  the  inheritance  tax  has  much  to  recommend  it. 

Taxes  on  business  have  also  become  increasingly 
important  and  may  be  expected  to  be  developed  still 
further.  These  existed  in  one  form  or  another  in  most 
European  countries  before  the  war.     As  Federal  taxes. 

409 


WAR  COSTS  AND  THEIR  FINANCING 

however,  they  were  new  in  the  United  States  until  the 
introduction  of  the  corporation  excise  and  excess  profits 
taxes.  The  productive  possibilities  of  these  taxes  have 
been  shown  during  the  war,  and  now,  when  revenue  is 
needed  so  urgently  in  all  the  foreign  belligerent  States, 
so  lucrative  a  source  will  not  lightly  be  given  up.  It  is 
not  improbable  that  the  excess  profits  tax  in  a  modified 
form  will  persist.  At  any  rate,  the  taxation  of  business 
profits  will  undoubtedly  constitute  an  important  source 
of  revenue  for  most  countries  in  the  immediate  future. 
Consumption  taxes  are  undergoing  a  transformation. 
The  internal  excise  taxes  are  being  shifted  from  the 
necessities  of  the  poor  to  the  luxuries  of  the  more  well- 
to-do.  In  addition  to  whiskey,  beer,  and  tobacco,  which 
have  always  been  favorite  objects  of  taxation,  other 
articles  of  luxurious  expenditure  are  now  being  drawn 
into  the  net.  The  luxury  tax,  which  was  introduced  into 
Great  Britain,  France,  and  the  United  States  at  the  very 
end  of  the  war,  was  belated  and  poorly  organized.  This 
tax  has  already  been  abolished  in  Great  Britain,  and  the 
tax  on  retail  sales  in  the  United  States  will  probably 
soon  go,  but  the  principle  of  taxing  luxurious  expendi- 
ture will  be  applied  in  other  ways.  Prohibition  and  the 
consequent  loss  of  revenue  from  that  source  forced  a 
solution  of  the  difficulty  in  the  United  States.  By  this 
act  revenues  were  sacrificed  which  in  1918  amounted  to 
about  $350,000,000.  Whether  this  deficiency  will  be 
made  up  by  the  introduction  of  new  consumption  taxes 
on  what  are  commonly  designated  "  food  luxuries," 
such  as  tea,  coffee,  cocoa,  and  sugar,  which  might  be 
made  to  yield  about  $250,000,000  annually,  or  by  a  con- 
tinuance and  expansion  of  taxes  on  such  articles  of 
luxury  as  automobiles,  musical  instruments,  sporting 
goods,  toilet  articles,  etc.,  is  as  yet  not  clear.     Certain 

410 


AFTER- WAR  PROBLEMS  OF  TAXATION 

it  is  that  large  revenues  can  be  obtained  only  from 
articles  of  large,  general  consumption. 

Customs  duties  are  almost  certain  to  increase.  One 
of  the  striking  results  of  the  war  has  been  tlie  growtii 
in  nationalistic  feelings  and  aspirations,  the  economic 
consequence  of  which  is  a  strong  recrudesence  of  pro- 
tectionism. The  demand  for  protection  is  emphasized 
in  Europe  at  present  by  the  unfavorable  condition  of 
exchange,  whicli  has  led  to  the  complete  prohibition  of 
certain  articles  or  the  limitation  of  imports  by  several 
European  nations.  This  movement,  which  even  in  free- 
trade  England  finds  expression  in  Imperial  preference, 
is  likely  to  persist  indefinitely.  Much  heavier  duties  on 
imports  may  therefore  be  expected,  but  as  these  will  be 
levied  to  a  considerable  extent  for  purposes  of  protec- 
tion, their  revenue-producing  character  will  be  rendered 
uncertain. 

Another  striking  financial  result  of  the  war  has  been 
the  growth  in  the  resort  to  fiscal  monopolies.  These  had 
existed  in  most  European  countries  before  1914  in  one 
form  or  another,  as  tobacco  in  France,  alcohol  in  Russia, 
salt  in  Switzerland,  etc.  But  during  the  war  there  was 
an  enormous  extension  of  Government  control  over 
industry,  partly  for  military,  partly  for  social,  and 
partly  for  fiscal,  reasons.  Although  the  first  reason  has 
disappeared,  the  other  two  still  persist,  especially  tlie 
third.  Governments  are  now  reorganizing  the  old  fiscal 
monopolies  or  establishing  new  ones  in  practically  all 
the  European  countries.  For  this  purpose  the  favorite 
articles  are  alcohol,  tobacco,  petroleum,  matches,  sugar, 
salt,  and  other  articles  of  general  consumption  the  sale 
of  which  can  be  easily  controlled.  Although  they  are 
protested  by  the  interests  whose  business  is  interfered 
with,  they  are  defended  on  the  double  ground  of  the 

411 


WAR  COSTS  AND  THEIR  FINANCING 

desirability  of  governmental  control  of  industry  and  of 
the  fiscal  needs  of  the  Treasury. 

In  conclusion,  it  may  be  said  that  the  framing  of  the 
revenue  systems  of  the  European  States  will  be  guided 
primarily  by  the  urgent  necessity  of  securing  revenue, 
but  the  new  taxes  to  be  developed  will  have  important 
industrial  and  social  consequences.  The  burdens  upon 
wealth  and  large  incomes,  whether  in  the  form  of 
returns  from  property  or  from  large  earning  power,  will 
undoubtedly  be  greater  than  they  were  before  the  war; 
indeed,  it  is  not  improbable  that  they  will  be  carried 
to  such  a  point  as  to  bring  about  a  slow  but  steady 
redistribution  of  wealth.  In  the  United  States  these 
taxes  should  serve  as  the  incentive  to  greater  exertion, 
but  in  more  than  one  of  the  European  States  there  is 
danger  that  the  burden  may  be  so  great  as  to  repress 
initiative  and  thrift,  and  even,  if  they  are  carried  to  the 
extreme  called  for  by  the  present  budgets,  to  partial 
repudiation  or  confiscation  under  the  guise  of  taxation. 


CHAPTER  XIV 


THE  COST  OF  THE  WAR 


Who  pays  for  a  war  —  Material  costs  —  Depletion  of  capital  — 
The  burden  on  future  generations  —  Direct  and  indirect 
costs  —  Immaterial  costs  —  Diversity  of  losses  —  Some  fac- 
tors of  advantage — Indefensibility  of  war. 

The  question  has  frequently  been  raised  as  to  who 
pays  for  a  war,  and  whether  it  is  possible  to  transfer 
a  part  of  the  burdens  to  future  generations. 

The  material  cost  of  a  war  is  measured  by  the 
resources  used  up  in  the  prosecution  of  the  war,  whether 
they  are  devoted  to  this  end  by  the  war-waging  coun- 
tries themselves  or  whether  they  are  destroyed  by  the 
enemy.  It  is  true  that  food  must  be  consumed  and  shells 
exploded  to-day  and  not  in  future  years.  A  war  must 
be  fought  with  goods  produced  at  the  time.  But  to  say 
this  does  not  imply  that  the  burden  of  war  may  not  be 
shared  by  future  generations.  If  all  the  war  expendi- 
tures were  met  out  of  current  production,  either  by 
enlarging  the  national  output,  or  by  economies  in 
personal  consumption,  or  by  non-investment  of  capital 
in  industries  not  contributing  to  the  prosecution  of  the 
war,  or  by  all  three  methods,  then  the  whole  cost  of  the 
war  would  be  borne  by  the  people  who  waged  it.  At 
the  end  of  the  struggle  all  the  bills  would  have  been 
paid.  But  such  a  pay-as-you-go  policy  was  manifestly 
impossible  in  the  World  War.  The  costs  equalled  the 
total  annual  national  prp-war  income  of  many  of  the 
belligerents,  and  in  some  cases  even  exceeded  it. 

413 


WAR  COSTS  AND  THEIR  FINANCING 

In  cases  where  the  money  cost  of  the  war  exceeded  the 
surplus  beyond  the  minimum  needs  of  the  people  for 
subsistence,  it  is  evident  that  it  was  necessary  to  resort 
to  the  savings  of  the  nation  and  to  use  up  accumulated 
capital  itself.  To  the  extent  to  which  existing  capitaJ 
was  reduced,  either  directly  by  being  used  for  war  pur- 
poses or  indirectly  through  lack  of  provision  for 
depreciation  and  obsolescence,  and  the  usual  savings 
thereby  prevented,  the  economic  position  of  the  nation 
was  rendered  worse  than  before  the  war.  As  a  result 
of  the  impairment  of  the  capital  fund,  the  ability  to 
produce  is  lessened.  Future  generations  will  in  such  a 
case  receive  a  depleted  heritage  of  capital.  Until  this 
is  made  good,  if  indeed  it  can  be,  future  generations  will 
share  the  burden  of  the  Avar  and  will  as  a  result  have  a 
lower  standard  of  living  than  they  otherwise  would  have 
enjoyed.  In  addition  to  this  indirect  cost,  they  will  also 
be  saddled  with  an  enormous  load  of  pensions,  interest 
on  the  foreign  debt,  and  other  charges  which  result 
directly  from  the  war.  In  these  tw^o  ways  they  will  feel 
and  share  its  burden. 

The  issue  of  bonds  wdiich  mature  at  a  date  more  or 
less  remote  does  not  alter  the  essential  facts.  This  is 
simply  the  method  by  which  the  Government  secures 
title  to  goods  and  command  over  services.  A  war  might 
be  financed  by  bond  issues  and  yet  be  borne  entirely  by 
the  generation  that  w^aged  the  war  if  they  increased 
tlie  national  income  by  an  amount  equal  to  the  cost  of 
the  war  or  saved  it  out  of  nonessential  expenditure. 
Bond  issues  constitute  a  device  for  distributing  the 
burden  among  the  people  of  the  warring  countries. 
Since,  however,  the  issue  of  bonds  does  not  exercise  the 
same  pressure  to  save  as  does  the  imposition  of  taxation, 
or  stimulate  in  the  same  degree  to  greater  exertion,  there 

414 


THE  COST  OF  THE  WAR 

is  apt  to  be  a  greater  using  up  of  capital  if  large 
resort  is  had  to  this  method.  By  as  much  as  the  exist- 
ing capital  fund  is  reduced,  succeeding  generations  will 
suffer  an  economic  loss,  and  to  that  extent  may  be  said  to 
pay  for  the  war. 

In  this  connection  there  is  a  certain  analogy  between 
the  situation  of  an  individual  and  that  of  a  nation.  An 
unusual  and  unexpected  expenditure  in  a  family, 
caused,  let  us  say,  by  a  sudden  accident  to  one  of  its 
members,  may  be  met  by  the  extra  effort  of  the  bread- 
winner, by  overtime  work,  or  by  unusual  personal 
economies.  Or,  on  the  other  hand,  no  change  may  be 
made  in  the  ordinary  expenditures  of  the  family,  but 
the  wliole  of  the  extra  sum  to  meet  the  new  financial 
burden  may  be  borrowed.  In  the  former  case  the  end 
of  the  convalesence  of  the  injured  one  finds  the  family 
in  the  same  economic  position  as  it  enjoyed  before  the 
accident,  although  for  a  time  they  have  endured  extra- 
ordinary sacrifices.  In  the  latter  case  they  will  have 
to  devote  their  energies  for  many  years  in  the  future 
to  paying  off  the  debt. 

It  is  impossible  to  say  to  what  extent  the  burden  of 
the  vfar  has  been  thrown  on  future  generations.  The 
amount  must  be  very  large,  for  practically  every  nation 
has  emerged  from  the  struggle  with  impaired  resources. 
Later  in  this  chapter  an  attempt  is  made  to  estimate 
in  very  general  terms  the  amount  of  damage  and  loss 
which  was  suffered  by  all  the  belligerent  nations  and  by 
those  neutral  countries  that  were  most  directly  affected 
by  the  war.  Speculative  as  any  such  estimate  must  be, 
it  is  equally  difficult  to  ascertain  the  extent  to  whicli  the 
war  was  paid  for  out  of  current  savings  and  enlarged 
production.  In  general  it  may  fairly  be  concludod  tliat 
this  can  be  measured  by  the  amount  of  taxation  collected 

415 


WAR  COSTS  AND  THEIR  FINANCING 

in  each  country.  Such  a  conchision  would  have  to  be 
modified  in  the  case  of  the  devastated  countries,  where 
the  diversion  of  wealth  to  war  purposes  would  be 
measured  by  the  amount  of  destruction  inflicted  by  the 
enemy,  rather  than  by  taxation.  In  those  regions 
enforced  economies  which  went  to  the  extent  of  dire 
privation  were  practiced.  But  unhappily  the  destruc- 
tion of  their  capital  prevented  the  residents  of  these 
districts  from  putting  forth  any  extra  efforts  towards 
production. 

The  payment  of  the  debt  does  not  mean  a  loss  to  the 
nation  if  the  debt  is  held  internally.  The  real  loss 
occurred  when  the  money  was  spent.  Debt  payment  is 
a  problem  in  distribution.  The  war  has  indeed  been 
paid  for,  but  a  subsequent  reassessment  of  expenses  is 
made  by  taxation.  If  this  assessment  is  jusf,  that  is, 
if  the  system  of  post-war  taxation  is  equitable  as  between 
income  groups,  then  no  evil  effects  in  the  distribution  of 
the  national  income  will  follow.  But  if  the  system  is 
so  arranged  as  to  transfer  wealth  from  the  less  well-to- 
do  to  the  rich,  bonanolaing  class,  serious  injustice  may 
result.  It  is  all-important  that  there  should  be  a  fair 
apportionment  of  taxation  as  between  the  richer  and 
the  poorer  classes. 

An  attempt  has  l)een  made  in  the  earlier  chapters  of 
this  volume  to  estimate  the  direct  money  cost  of  the 
war,  and  the  conclusion  was  reached  that  this  amounted 
in  round  numbers  to  $186,000,000,000.  This  estimate 
did  not  take  into  account  the  indirect  costs,  such  as  the 
loss  of  human  life,  the  destruction  of  property,  the 
depreciation  of  capital,  tbe  loss  of  production,  the  inter- 
ruption to  trade,  and  similar  items.  Another  study  by 
the  present  writer  attempts  to  estimate  these  varied 
factors    and    to    reduce    them    to    a    common    money 

416 


THE  COST  OF  THE  WAR 

standard.     The  following  summary  statement  is  taken 
from  that  book  :^ 

In  conclusion,  an  attempt  may  be  made  to  bring  together 
the  scattered  data  of  this  study  into  one  final  comprehensive 
pictvire  which  shall  show  the  total  cost  of  the  Avar.  The 
direct  costs  were  estimated  at  $186,333,637,097.  The  indirect 
costs  are  now  seen  to  have  amounted  to  almost  as  much 
more.  The  combined  direct  and  indirect  costs  are  set  forlli 
by  the  principal  items  in  the  following  table : 

Direct  and  Ixdirect  Costs  of  the  World  War 

Total  direct  costs,  net   $186,333,637,097 

Indirect  costs: 

Capitalized  value  of  human  life: 

Soldiers*   $33,551,276,280 

Civilian 33,551,276,280 

Property  losses : 

On  land   29,960,000,000 

Shipping  and   cargo    6.800,000.000 

Loss  of  production    45.000.000.000 

War  relief   1.000.000.000 

Loss  to  neutrals    I,750,000.!o00 

$151,612,542,560 
Total   indirect  costs    151,612,542.560 

Grand  total   $337,946,179,657 

*  No  attempt  has  been  made  to  place  a  money  value  on  the 
injuries  done  to  crippled  soldiers  and  the  invalided  and  devital- 
ized army  and  civilian  population.  If  this  were  included  the 
totals  would  be  considerably  increased. 

Stupendous  as  are  the  figures  just  given,  they  fail 
properly  to  set  forth  all  the  losses  involved  in  war.  The 
losses  of  human  life  and  the  sufferings  and  privations 
represented  by  the  destruction  of  property  and  loss 
of  production  cannot  be  reduced  to  a  money  standard 
without  losing  their  real  meaning.  Nor  do  statistics  of 
war  debts  measure  accurately  the  burdens  of  the  future. 

> "  Direct  and  Indirect  Costs  of  the  Creat  World  War " 
(Carnegie  Endowment  for  International  Peace,  1919),  p.  299. 

417 


WAR  COSTS  AND  THEIR  FINANCING 

The  really  serious  burdens  of  the  war  cannot  be  reduced 
to  statistics  or  presented  in  tabular  form.  Material 
resources  can  be  replaced  in  a  comparatively  short  space 
of  time,^  but  the  immaterial  intangible  losses  and 
burdens  may  persist  for  generations.  The  physical 
deterioration  in  the  population  as  a  result  of  the  death 
of  the  fittest  males  has  been  attested  for  past  wars  by 
more  than  one  writer,^  and  since  the  loss  of  life  was  so 
enormous  in  the  World  War,  amounting  to  about 
13,000,000  for  soldiers  and  as  many  more  for  civilians, 
there  is  every  reason  +o  expect  a  serious  lowering  of 
racial  vitality  and  of  personal  vigor  throughout  the 
major  part  of  Europe. 

It  is  almost  impossible  to  enumerate  all  of  the  other 
manifold  items  which  constitute  the  real  burden  of  the 
war,  but  a  rough  analysis  of  the  principal  losses  and 
burdens  may  be  given.  Such  a  classification  would 
cover  the  following  points:  (1)  the  loss  of  men  through 
death  and  disablement;  (2)  the  reduction  of  national 
physical  vitality  as  a  result  of  privation,  overwork, 
anxiety,  strain,  etc.;  (3)  the  loss  of  capital  and 
resources  through  actual  destruction,  diversion  to  war 
purposes,  deterioration,  depreciation,  etc. ;   (4)  the  loss 

^  John  Stuart  Mill,  speaking  of  the  recuperative  power  of  a 
country  after  war,  says:  "  What  the  enemy  has  destroyed  woukl 
have  been  consumed  in  a  little  time  by  the  inhabitants  them- 
selves. .  .  .  Nothing  is  changed,  except  that  during  the  period 
of  reproduction  they  have  not  now  the  advantage  of  consuming 
what  had  been  produced  previously.  The  possibility  of  a  rapid 
repair  of  their  disasters  mainly  depends  upon  whether  the  country 
has  been  depopulated."  Principles  of  Political  Economy,  Book  I, 
V,  Sec.  7,  Ashley's  ed.,  p.  74. 

^D.  S.  Jordan,  The  Blood  of  the  Nation:  a  Study  of  the  Decay 
of  Races  through  the  Survival  of  the  Unfit  (Boston,  1910)  and 
^Yar  and  the  Breed:  the  Relation  of  M^ar  to  the  Downfall  of 
Nations  (Boston,  1915);  V.  L.  Kellogg,  Eugenics  and  Militarism 
(London,  1912)  and  Military  Selection  and  Race  Deterioration 
(Oxford,   1916). 

418 


THE  COST  OF  THE  WAR 

of  production  through  the  withdrawal  of  men  from 
normal  production,  lowered  efficiency,  poorer  tools, 
scarcity  of  raw  materials,  unemployment;  (5)  the  extent 
to  which  the  country  has  mortgaged  the  future  by  bor- 
rowing abroad.  And  even  this  list  does  not  include  the 
imponderable  evils  such  as  the  lowering  of  ethical 
standards,  the  destruction  of  approved  social  mores,  and 
in  some  instances,  it  would  seem,  from  events  of  recent 
history,  the  very  undermining  of  modern  industrial 
institutions. 

On  the  other  hand,  certain  offsets  may  be  mentioned 
wdiich  reduce  to  a  certain  extent  the  evil  eft'ects  of  the 
factors  just  described.  Just  as  a  fire  sometimes  sweeps 
away  ramshackle  buildings  or  clears  out  a  slum  district 
which  inertia  or  ignorance  has  maintained,  so  a  war 
jostles  people  out  of  old  habits,  calls  for  new  methods 
of  production  and  organization,  ajid  teaches  lessons  of 
cooperation  and  common  social  purposes.  The  produc- 
tive capacity  of  a  nation  may  even  be  increased,  in  spite 
of  loss  of  life  and  material  resources,  as  a  result  of 
changes  wa^ought  by  war.  Lloyd-George  is  responsible 
for  the  statement,  made,  to  be  sure,  comparatively  early 
in  the  struggle  (1916),  that  improvements  in  industry 
and  the  more  effective  control  of  the  liquor  industry 
resulting  from  the  war,  would  compensate  for  all 
economic  losses.  An  almost  invariable  economic  accom- 
paniment and  aftermath  of  previous  wars,  moreover, 
has  been  a  quickening  of  inventive  genius.  Labor-saving 
machinery  and  more  efficient  methods  of  production 
have  been  substituted  in  many  parts  of  Europe  for 
antiquated  and  inefficient  processes.  The  movement 
toward  the  greater  democratization  of  industry,  which, 
like  most  popular  movements,  has  at  first  revealed  its 
most  radical  and  even  dangerous  possibilities,  w'ill  prob- 

419 


WAR  COSTS  AND  THEIR  FINANCING 

ably  in  the  long  run  be  counted  as  a  step  forward  in 
the  slow  march  toward  social  justice. 

But  after  all  allowances  have  been  made,  the  net 
result  is  one  c>f  indescribably  heavy  burdens  and  losses. 
No  more  serious  indictment  of  war  can  be  made  than  the 
impartial  cataloguing  of  its  costs.  The  economic  and 
financial  indefensibility  of  war  has  been  abundantly  set 
forth,  it  is  hoped,  in  the  previous  pages  of  this  book. 
For  one  who  has  studied  its  effects  there  can  be  no  more 
fervent  prayer  than  that  a  repetition  of  similar  events 
may  be  rendered  unlikely,  if  not  impossible,  for  all  time. 
It  may  not  be  possible  wholly  to  abolish  war,  but  it  is 
unlikely  that  the  nations  of  the  world  will  ever  again 
be  plunged  into  a  world  struggle  except  in  defense  of 
some  common  ideal  of  international  justice.  To  the 
principle  of  international  arbitration,  administered  by 
some  such  organization  as  a  League  of  Nations,  as  dis- 
tinguished from  the  appeal  to  force  in  the  settlement  of 
international  difficulties,  all  thinking  men  must  sub- 
scribe. War,  as  a  method  of  determining  international 
rivalries,  stands  condemned  on  many  counts,  but  on 
none  more  decisively  than  on  that  of  cost. 


APPENDICES 


APPENDIX  I 

british  moeatoeium  proclamations 

1.  Proclamation  Postponing  Payment  of  Bills  of  Ex- 
CHANGEj  August  2,  1914 

.  .  .  If  on  the  presentation  for  jDayment  of  a  bill  of 
exchange,  other  than  a  cheque  or  bill  on  demand,  which  has 
been  accepted  before  the  beginning  of  the  fourth  day  of 
August,  nineteen  hundred  and  fourteen,  the  acceptor  re-accepts 
the  bill  by  a  declaration  on  the  face  of  the  bill  in  the  form 
sot  out  hereunder,  that  bill  shall,  for  all  i^urposes,  including 
the  liability  of  any  drawer  or  indorser  or  any  party  thereto, 
be  deemed  to  be  due  and  be  paj^able  on  a  date  one  calendar 
month  after  the  date  of  its  original  maturity,  and  to  be  a 
bill  for  the  original  amount  thereof  increased  by  the  amount 
of  interest  thereon  calculated  from  the  date  of  re-acceptance 
to  the  new  date  of  payment  at  the  Bank  of  England  rate 
current  on  the  date  of  re-acceptance  of  the  Bill. 

Form :     Re-accepted  under  Proclamation  for  £ 

(insert  increased  sum). 

Signature 

Date 

2.  Proclamation  of  August  6,  1914 
Save  as  hereinafter  provided,  all  payments  which  have 
become  due  and  pa^^able  before  the  date  of  this  Proclamation, 
or  which  will  become  due  and  payable  on  any  day  before 
the  beginning  of  the  Fourth  day  of  September,  nineteen 
hundred  and  fourteen,  in  respect  of  any  bill  of  exchange 
(being  a  cheque  or  bill  on  demand)  which  was  drawn  before 
the  beginning  of  the  Fourth  day  of  Augusst,  nineteen  hundred 
and  fourteen,  or  in  respect  of  any  negotiable  instrument  (not 
being  a  bill  of  exchange)  dated  before  that  time  or  in  respect 
of  any  contract  made  before  that  time,  shall  be  deemed  to 
be  due  and  jiayable  on  a  day  one  calendar  month  after  the 

423 


WAR  COSTS  AND  THEIR  FINANCING 

day  on  wliich  the  payment  originally  became  due  and  pay- 
able, or  on  the  Fourth  day  of  September,  nineteen  hundred 
and  fourteen,  whichever  is  the  later  date,  instead  of  on  the 
day  on  which  the  payment  originally  became  due;  but  pay- 
ments so  postponed  shall,  if  not  otherwise  carrying  interest, 
and  if  specific  demand  is  made  for  payment  and  payment  is 
refused,  carry  interest  until  payment  as  from  the  Fourth  day 
of  August,  nineteen  hundred  and  fourteen,  if  they  become 
due  and  jjayable  before  that  day,  and  as  from  the  date  on 
which  tlicy  become  due  and  payable  if  they  become  due  and 
payable  on  or  after  that  day,  at  the  Bank  of  England  rale 
current  on  the  Seventh  day  of  August,  nineteen  hundred  and 
fourteen;  but  nothing  in  +his  Proclamation  shall  prevent  pay- 
ments being  made  before  the  expiration  of  the  month  for 
which  they  are  so  postponed. 

This  i)roclamation  shall  not  apply  to: 

(1)  any  payment  in  respect  of  Avages  or  salary; 

(2)  any  payment  in  resi)eet  of  a  liability  Avliich  when  in- 
curred did  not  exceed  five  pounds  in  amount; 

(3)  Any  payment  in  respect  of  rates  or  taxes; 

(4)  any  payment  in  respect  of  maritime  freight; 

(5)  any  payment  in  respect  of  any  debt  from  any  person 
resident  outside  the  British  Islands,  or  from  any  firm, 
company  or  institution  whose  principal  place  of  business 
is  outside  the  British  Islands  not  being  a  debt  incurred 
in  the  British  Islands  by  a  person,  firm,  company,  or 
institution  having  a  business  establishment  or  branch 
business  establishment  in  the  British  Islands; 

(6)  any  payment  in  respect  of  any  dividend  or  interest 
payable  in  respect  of  any  stocks,  funds,  or  securities 
(other  than  real  or  heritable  securities  in  which  tnistees, 
are,  under  Section  One  of  the  Trustee  Act,  1893,  or  any 
other  Act  for  the  time  being  in  force,  authorized  to 
invest; 

(7)  any  liability  of  a  bank  of  issue  in  respect  of  bank 
notes  issued  by  that  bank; 

(8)  any  jiayment  to  be  made  b}'  or  on  behalf  of  Ilis 
Majesty  or  any  Government  Department,  including  the 
payment  of  old  age  pensions; 

(9)  any  payment  to  be  made  by  any  person  or  society  in 
pursuance  of  the  National  Insurance  Act,  1911,  or  anv 

424 


BRITISH  MORATORIUM  PROCLAMATIONS 

Act  amending  that  Act  (whether  in  the  nature  of  contri- 
butions, benefits,  or  otlierwise) ; 

(10)  any  paj'nient  under  the  Workmen's  Compensation  Act, 
1906,  or  any  Act  amending  the  same; 

(11)  any  payment  in  respect  of  the  withdrawal  of  a  deposit 
by  a  depositor  in  a  trustee  savings  bank. 

Nothing  in  this  Proclamation  shall  affect  any  bills  of  ex- 
change to  which  Our  Proclamation  dated  the  Second  day  of 
August,  nineteen  hundred  and  fourteen,  relating  to  the  post- 
ponement of  payment  of  certain  bills  of  exchange  applies. 

3.  Proclamation  of  August  12,  1914 
Nothwithstanding  anything  contained  in  the  Proclamation, 

dated  the  sixth  day  of  August,  nineteen  hundred  and  fourteen 
relating  'to  the  postponement  of  payments),  that  Proclamation 
shall  apply,  and  shall  be  deemed  always  to  have  applied: 
(rt)   to  any  bill  of  exchange  Avhicli  has  not  been  re-accepted 
under  Our  Proclamation,  dated  the  second  day  of  August, 
nineteen  hundred  and  fourteen,  as  it  applies  to  a  bill  of 
exchange,  being  a  cheque  or  bill  on  demand,  unless  on  the 
presentation  of  the  bill  the  acceptor  has  expressly  refused 
re-acceptance  thereof,  but  with  the  substitution,   as  re- 
spects rate  of  interest,  of  the  date  of  the  presentation 
of  the  bill  for  the  seventh  day  of  August,  nineteen  hun- 
dred and  fourteen ;  and     . 
(&)   also   to   payments   in   resj^ect   of   any   debt  from   any 
bank  Avhose  principal  place  of  business  is  in  any  part 
of  His  Majesty's  Dominions  or  any  British  Protectorate, 
although  the  debt  was  not  incurred  in  the  British  Islands 
and  the  bank  had  not  a  business  establishment  or  branch 
business  establishment  in  the  British  Islands. 

4.  Proclamation  of  September  3,  1914 

1.  If  on  the  presentation  for  pajmient  of  a  bill  of  exchange 
which  has  before  the  fourth  day  of  September,  nineteen 
hundred  and  fourteen,  been  re-accepted  under  the  terms  of 
Our  said  Proclamation,  dated  the  second  day  of  August, 
nineteen  hundred  and  fourteen,  the  bill  is  not  paid,  then, 
the  said  Proclamation  shall,  in  its  application  to  that  bill, 
have  effect  as  if  the  period  of  two  calendar  months  had  been 

425 


WAR  COSTS  AND  THEIR  FINANCING 

in  the  Proclamation  substituted  for  the  period  of  one  calendar 
month,  and  the  sum  mentioned  in  the  form  of  re-acceptance 
under  the  said  Proclamation  shall  be  deemed  to  be  increased 
by  the  amount  of  interest  on  the  original  amount  of  the  bill 
for  one  calendar  month  calculated  at  the  Bank  of  England 
rate  current  on  the  date  when  the  bill  is  so  jDresented  for 
payment  as  aforesaid. 

2.  Our  said  Proclamation,  dated  the  sixth  day  of  August, 
nineteen  hundred  and  fourteen,  as  extended  by  Our  said 
Proclamation,  dated  the  twelfth  day  of  August,  nineteen  hun- 
dred and  fourteen,  shall  apply  to  payments  which  become 
due  and  j^ayable  on  or  after  the  fourth  day  of  September 
and  before  the  fourth  day  of  October,  nineteen  hundred  and 
fourteen  (whether  they  become  so  due  and  payable  by  virtue 
of  the  said  Proclamations  or  otherwise)  in  like  manner  as  it 
applies  to  payments  which  became  due  and  payable  after  the 
date  of  the  said  first  mentioned  Proclamation  and  before  the 
beginning  of  the  fourth  day  of  September,  nineteen  hundred 
and  fourteen. 

3.  Nothing  in  this  Proclamation  shall  effect  the  payment 
of  interest  under  the  Proclamation  extended  thereby,  or  j^re- 
vent  payments  being  made  before  the  expiration  of  the  period 
for  which  they  are  postponed. 

5.  Proclamation  of  September  30,  1919 
1.  The  first  General  Proclamation  as  extended  by  paragraph 
(b)  of  the  Second  General  Proclamation  shall,  subject  to  the 
limitations  of  this  Proclamation,  apply  to  payments  which  be- 
come due  and  payable  on  or  after  the  fourth  day  of  October 
and  before  the  fourth  day  of  November,  nineteen  hundred  and 
fourteen  (whether  they  so  Ijecome  due  and  payable  by  virtue 
of  the  said  Proclamations  or  the  third  General  Proclamation 
or  otherwise),  in  like  manner  as  it  applies  to  payments  which 
become  due  and  payable  after  the  date  of  the  first  General 
Proclamation  and  before  the  beginning  of  the  fourth  day  of 
September,  nineteen  hundred  and  fourteen. 

Provided  that,  if  the  payment  is  one  the  date  whereof  has 
been  postponed  by  virtue  of  any  of  the  said  General  Proclama- 
tions, and  is  one  which  carries  interest  either  by  virtue  of  the 
terms  of  the  contract  or  instrument  under  which  it  is  due  and 
payable  or  by  virtue  of  the  said  General  Proclamations,  then 

426    . 


BRITISH  MORATORIUM  PROCLAMATIONS 

the  person  from  whom  the  payment  is  due  shall  not  be 
entitled  to  claim  the  benefit  of  this  Article  unless,  within 
tliree  days  after  the  date  to  which  the  payment  has  been 
postponed  by  virtue  of  the  said  General  Proclamations,  all 
interest  thereon  up  to  that  date  is  paid. 
This  Article  shall  not  apply  to: 

(a)  Any  payment  in  respect  to  rent; 

(b)  Any  payment  due  and  payable  to  or  by  a  retail  trader 
in  respect  to  his  business  as  such  trader. 

2.  The  Bills  (Re-accciitance)  Proclamation  shall  continue 
to  apply  to  bills  of  exchange  (other  than  cheques  and  bills 
on  demand)  accepted  before  the  beginning  of  the  fourth  day 
of  August  nineteen  hundred  and  fourteen,  the  date  of  the 
original  maturity  whereof  is  after  the  third  day  of  October. 

If  on  the  presentation  for  payment  of  any  such  bill  the  bill 
is  not  paid  and  is  not  reaccepted  under  the  said  Proclamation, 
then,  unless  on  such  jDresentation  the  acceptor  has  expressly 
refused  re-aceeptance  thereof,  the  bill  shall  for  all  purposes, 
including  the  liability  of  any  drawer  and  indorser  or  any 
other  party  thereto,  be  deemed  to  be  due  and  payable  on  a 
date  one  calendar  month  after  the  date  of  its  original  maturity 
instead  of  on  the  date  of  its  original  maturity,  and  to  be  a 
bill  for  the  original  amount  thereof  increased  by  the  amount 
of  interest  thereon,  calculated  from  the  date  of  the  original 
maturity  to  the  date  of  payment  at  the  Bank  of  England 
rate  current  on  the  date  of  its  original  maturity,  and  para- 
graph (a)  of  the  second  General  Proclamation  shall  not  apply 
to  any  such  bill. 

3.  If  on  the  presentation  for  payment  of  a  bill  of  exchange, 
the  date  of  maturity  of  which  has  before  the  fourth  day  of 
October  nineteen  hundred  and  fourteen  become  postponed 
either  by  virtue  of  the  Bills  (Re-acceptance)  Proclamation  or 
paragraph  (a)  of  the  second  General  Proclamation  (whether 
or  not  the  date  of  maturity  has  been  further  postponed  by 
virtue  of  the  third  General  Proclamation),  the  bill  is  not 
paid,  then  the  date  of  maturity  shall  be  deemed  to  be  further 
postponed  for  fourteen  days  from  the  date  of  such  presentation 
for  payment,  and  the  original  amount  of  the  bill  shall  be 
deemed  to  be  further  increased  by  the  amount  of  interest  on 
the  original  amount  of  the  bill  for  fourteen  days,  calculated 

427 


WAR  COSTS  AND  TIIEIK  FINANCING 

at  the  Bank  of  England  rate  current  on  the  date  of  such 
presentation  for  payment. 

4.  Save  as  otherwise  expressly  provided,  nothing  in  this 
Proclamation  shall  affect  the  application  of  the  General 
Proclamations  to  payments  to  which  those  Proclamations 
ajiply,  and  nothing  in  this  Proclamation  shall  i^revent  pay- 
ments to  which  this  Proclamation  applies  being  made  before 
the  expiration  of  the  period  for  which  they  are  postponed 
thereunder. 


APPENDIX  II 

FRENCH   MORATORIUM  DECREES" 

On  July  29,  191-4,  the  first  moratorium  was  decreed. 
The  maturity  of  obligations  entered  into  before  August 
1,  1914,  and  falling  due  after  that  date  or  before 
August  15,  1914,  was  postponed  30  days. 

On  August  2,  1914,  the  above  decree  was  applied  to 
deposits  in  banks  and  institutions  of  credit :  if  less  than 
250  francs,  the  whole  could  be  drawn ;  if  more  than  that 
sum,  only  five  per  cent,  of  the  excess,  in  addition  to  250 
francs;  commercial  or  industrial  employers  of  labor 
could  draw  the  whole  for  wages;  and  the  decree  was 
applied  to  savings  and  insurance  contracts. 

These  two  early  decrees  were  completed  by  that  of 
August  9,  1914,  which  follows: 

Decree  op  August  9,  1914 

Art.  1.  For  all  negotiable  instruments  falling  due  after 
July  31,  1914,  inclusively,  or  maturing  before  September  1, 
1914,  the  date  of  payment  is  delayed  tliii'ty  days,  on  condition 
that  they  were  underwritten  previous  to  August  4,  1914. 

The  negotiable  instruments  in  the  view  of  the  present 
article  are:  bills  of  exchange;  notes  to  order,  or  to  bearer; 
checks,  with  the  exception  of  those  presented  by  the  drawer 
himself;  orders  and  warrants. 

Not  falling  under  the  application  of  the  present  article 
are  negotiable  instruments  issued  upon  the  public  Treasury. 

Art.  2.  [Applies  to  commitments  for  merchandise  entered 
into  before  August  4,  1914.] 

Art.  3.     [Applies  likewise  to  advances  on  movables.] 

Art.  J^.  [Applies  to  demands  for  deposits,  except  up  to 
250   francs,   plus   five   per   cent.,    etc.;   not    to   demands   for 

*  Printed  in  J.  L.  Laughlin.  Credit  of  the  Nations  (1918), 
p.  369. 

429 


WAR  COSTS  AND  THEIR  FINANCING 

paying  labor;  not  to  those  whose  establishments  have  been 
requisitioned,  etc.] 

Art.  5.  The  postponement  of  thirty  days  dating  from 
August  1,  1914,  is  applicable  to  the  redemption  of  obligations 
or  contracts  of  insurance,  of  capitalisation  or  savings  for 
fixed  terms,  or  those  stipulated  to  be  redeemable  at  the  will 
of  the  owner  or  bearer. 

On  August  10,  1914,  all  prescriptions  and  limitations, 
civil,  commercial,  or  administrative  were  suspended  until 
the  end  of  the  war.  They  were  further  treated  by  the 
decree  of  December  16,  1914,  and  modified  by  that  of 
May  12.  1915. 

The  main  moratorium  of  August  9  was  given  more  in 
detail  on  August  29,  1914,  and  extended  until  October  1, 
1914.  On  the  same  day,  a  decree  suspended  payments 
on  obligations  of  departments,  communes,  etc.,  until  the 
end  of  the  war. 

Fro2n  time  to  time  the  moratorium  was  extended  by 
many  decrees  as  follows : 

September  27,  1914,  30  days  to  November  1,  1914 
October  27,  1914,  60  days  to  January  1,  1915 
December  15,  1914,  60  days  to  March  1,  1915 
February    25,  1915,  60  davs  to  May  1,  1915 

April  15,  1915,  90  days  to  August        1,  1915 

June  24,  1915,  90  days  to  November  1,  1915 

October  16,  1915,  60  days  to  Jamiary  1,  1916 
December  23,  1915,  90  days  to  April  1,  1916 

March         18,  1916,  90  days  to  July  1,  1916 

June  24,  1916,  90  days  to  October       1,  1916 

September  20,  1916,  90  days  to  January      1,  1917 

Out  of  a  total  of  4,480  million  francs  in  August,  1914, 
postponed  at  the  Bank  of  France  (from  which  should 
be  deducted  800  millions  for  those  under  the  colors  or 
in  territory  occupied  by  the  enemy)  the  amount  remain- 
ing December  14,  1916,  was  only  1,346  millions.  Suc- 
cessful efforts  had  been  made  to  have  postponed  debts 
paid  up,  and  in  December,  1916,  practically  no  delay 

430 


FRENCH  MORATORIUM  DECREES 

was  granted  unless  good  cause   could  be  shown   to   a 
magistrate.      Thereafter  moratorium   decrees   ceased. 

Decree  op  September  27,  1914,  Concerning  Transactions 
IN  Securities 

Art.  1.  Provisionally  suspended  are  all  demands  for  pay- 
ments and  all  judicial  actions  relative  to  the  sale  and  purchase 
in  the  period  previous  to  August  4,  1914,  of  rentes,  pubUc 
securities,  and  other  transferable  instruments,  as  well  as  the 
dealings  for  carrying  them  forward. 

The  sums  due  by  reason  of  these  sales,  purchases,  and 
carrying  charges  should  be  increased  by  interest  for  the 
time  of  postponement  at  the  rate  of  five  per  cent,  per  annum. 

This  decree  was  modified  by  that  of  September  14, 
1915,  which  brought  pressure  on  all  not  under  the  colors 
or  in  occupied  territory  to  make  payment  of  10  per  cent, 
of  dififerences  due  in  settlements,  and  6  per  cent,  on 
delayed  payments. 


APPENDIX  III 

ACT    PROVIDING   FOR   GERMAN   LOAN    OFFICES^ 


Darlehnskassen  Act  (Reichsgesetzbl.,  P.  340)  August  4, 

1914 

1.  lu  Berlin  and  those  places  within  the  EmjDiro,  in  which 
there  is  a  branch  or  agency  of  the  Reichsbank,  shall  be  estab- 
lished wherever  necessary,  on  the  order  of  the  Imperial 
Chancellor,  according  to  the  report  of  the  Committee  on  Trade 
and  Commerce  of  the  Federal  Council  (Bundesrath) ,  Loan 
Bureaus  (Darlehnskassen)  for  the  jjurpose  of  making  loans 
on  security  to  meet  the  need  of  credit,  especially  in  the 
interest  of  trade  and  industry. 

Su])sidiary  branches  of  the  Darlehnskassen  may  be  estab- 
tablishcd  in  other  than  the  designated  places  to  aid  in  the 
work  of  lending  and  of  building  up  depots. 

2.  For  the  full  amount  of  the  loan  granted  shall  be  paid 
out  of  a  special  form  of  money  known  as  "  Darlehnskassen- 
scheine."  These  notes  shall  be  received  at  their  full  face 
value  in  i^aj^ment  at  all  the  Imperial  offices  as  well  as  at  all 
the  public  offices  of  the  States  of  the  Empire ;  in  private  trans- 
actions they  shall  not  be  a  compulsory  means  of  payment. 

In  the  meaning  of  paragraphs  9,  17  and  44  of  the  Bank 
Act  of  March  14,  1875,  the  notes  of  the  Loan  Bureavis  stand 
on  the  same  footing  as  the  Reichskassenscheine  (Imperial 
Ti'easury  notes). 

The  total  amount  of  the  notes  of  the  Loan  Bureaus  shall 
not  exceed  1500  million  marks.  The  Federal  Council  is 
empowered  in  case  of  necessity  to  raise  the  amount  of  notes 
outstanding. 

No  notes  of  Loan  Bureaus  shall  be  issued  by  the  manage- 
ment of  the  Loan  Bureaus  (paragraph  13)  for  which  sufficient 
security,  as  fixed  by  paragraphs  4  and  6,  shall  not  be  provided. 

^Printed  in  J.  L.  Laughlin,  Credit  of  the  Nations  (1918), 
p.  384. 

432 


ACT  PROVIDING  FOR  GERMAN  LOAN  OFFICES 

Before  their  issue,  an  exact  description  of  the  notes  shall 
be  made  iDublic  by  the  management  of  the  Loan  Bureau. 

3.  Loans  can  be  given  for  not  less  than  100  marks,  and 
shall  not  run  as  a  rule  for  a  longer  term  than  three,  and  only 
in  exceptional  circumstances  for  six,  months. 

4.  The  security  may  consist  of : 

(rt)  The  pledge  of  industrial,  agricultural  and  mineral 
products  and  non-jjerishable  merchandise,  stored  within  the 
limits  of  the  Emi)ire,  as  a  rule,  for  one-half,  or  in  exceptional 
cases,  for  two-thirds  of  their  value,  according  to  differences 
of  circumstances  and  salability. 

(t)  The  pledge  of  securities  issued  by  the  Empire,  or  by 
the  government  of  a  German  State,  or  those  conforming  to 
legal  reqiaircments  issued  by  corporations,  joint-stock  com- 
panies, or  limited  partnerships,  which  are  located  within  the 
Empire,  at  a  reduction  from  their  current  or  market  price. 
Paper  not  running  in  the  name  of  the  bearer  must  be  trans- 
ferred to  the  Loan  Bureaus. 

(c)  The  pledge  of  other  securities  which  the  management 
(paragraph  13)  declare  to  be  satisfactory. 

For  the  fulfillment  of  the  jjledge  of  articles  mentioned  in 
(a)  it  suffices,  instead  of  actual  delivery,  to  indicate  the  pledge 
clearly  by  some  external  mark,  such  as  a  tablet  or  the  like. 

o.  Commodities  which  are  subject  to  serious  changes  of 
price  will  be  accepted  as  pledge  only  if  a  third  solvent  person 
guarantees  the  payment  of  the  loan. 

6.  A  loan  may  also  be  protected  by  the  pledge  of  claims, 
which  have  been  entered  in  the  Imperial  Debt  Records 
{ReichsschuldbiicJi)  or  in  that  of  a  German  State,  at  a  reduc- 
tion from  the  current  value  determined  according  to  the  face 
value  and  the  rate  of  interest  of  the  obligations  corresponding 
to  the  pledged  claims. 

In  case  a  mortgage  on  a  claim  of  the  sort  mentioned  in  the 
first  paragraph  be  inscribed  on  the  records  in  favor  of  the 
Loan  Bureau,  it  is  sufficient  to  have  the  attestation  of  two 
members  of  the  Board  of  Directors. 

As  to  the  attestation,  the  regulations  of  paragraph  183  of 
the  Act  concerning  matters  of  voluntary  jurisdiction  have  like 
application. 

7.  If  a  mortgage  to  a  Loan  Bureau  has  been  entered  on 
the  records    (paragraph  6),  the  Bureau  thereby  acquires  a 

433 


WAR  COSTS  AND  THEIR  FINANCING 

right,  even  if  a  third  i^erson  has  a  claim  on  it,  prior  to  the 
rights  of  that  third  person  unless  the  right  of  the  third  person 
had  been  entered  at  the  time  of  the  inscrij^tion  of  the  mortgage 
on  the  records;  or  was  known  at  that  time  to  the  Bureau;  or 
was  not  known  because  of  gi'oss  negligence. 

If  the  debtor  has  delayed  meeting  the  obligation  secured 
by  the  pledge,  the  Administration  of  Debt  Records  is  thereby 
empowered  and  obliged,  on  a  written  request  of  the  Loan 
Bureau,  without  requiring  any  proof  of  the  delay,  to  issue 
obligations  payable  to  bearer  to  liquidate  the  whole  or  a 
corresponding  part  of  the  claim;  unless  an  order  of  the 
court  intervenes  which  forbids  the  j^ayment  to  the  Loan 
Bureau;  or  unless  some  right  of  a  third  person,  or  a  limitation 
of  the  mortgage  in  favor  of  the  third  person  has  been 
recorded,  w'hieli  was  entered  earlier  than  the  pledge  in  favor 
of  the  Loan  Bureau. 

The  Administration  of  the  Records  must  inform  the  Loan 
Bureau  of  later  entries  affecting  the  adequacy  of  the 
obligation. 

As  to  the  satisfaction  of  the  Loan  Bureau  regarding  the 
obligations  discharged  by  the  Administration  of  the  Debt 
Records,  the  regulations  of  paragraphs  10,  11  have  corre- 
sponding application. 

8.  The  rate  of  interest  on  a  loan  granted  shall  as  a  rule  not 
be  higher  than  the  published  rate  at  which  the  Reiehsbank 
buys  bills  of  exchange. 

9.  The  security  should  suffice  for  the  principal,  interest,  and 
expenses;  these  secondary  claims  should  be  deducted  from  the 
sum  of  the  loan. 

10.  If  payment  is  not  made  at  maturity,  the  Loan  Bureau 
may  sell  the  security  through  one  of  its  officials  or  a  broker 
and  reimburse  itself  out  of  the  proceeds.  The  Loan  Bureau 
shall  dispose  of  the  security  only  to  the  highest  bidder  in  the 
open  market. 

11.  Also,  if  the  debtor  should  go  into  bankruptcy,  the  Loan 
Bureau  retains  the  right  to  sell  the  security  Avithout  an  order 
of  the  Court.  (Paragraph  127,  Sec.  2,  of  the  Bankruptcy 
Act  of  May  20,  1898,  does  not  apply.) 

12.  The  Loan  Bureaus  form  independent  institutions  with 
the  attributes  and  rights  of  a  legal  persona.  Their  business 
enjoys  freedom  from  stamps  and  duties. 

434 


ACT  PROVIDING  FOR  GERMAN  LOAN  OFFICES 

13.  The  Reiclisbauk  assumes  the  management  of  the  Loan 
Bureaus  under  the  direction  of  the  Imperial  Cliancellor  in 
the  interest  of  the  Emjjire,  but  quite  ajjart  from  its  other 
business.  The  general  administration  shall  be  established  in 
Berlin  in  a  special  bank  department  known  as  the 
"  Hauptvericaltung  der  Darlehnskassen  "  according  to  more 
detailed  directions  given  by  the  ImiDerial  Chancellor.  In  addi- 
tion, there  shall  be  appointed  for  each  Loan  Bureau  a  Special 
Board  of  Directors  subordinate  to  the  Ilauptvenccdtung,  to 
which  shall  be  api)ointed  by  the  Imperial  Chancellor  a  repre- 
sentative of  the  Empire  as  Avell  as  members  from  the  com- 
mercial or  industrial  classes.  The  Imjierial  Chancellor  issues 
instructions  for  the  conduct  of  the  business  of  the  Loan 
Bureaus. 

14.  The  opening  of  the  Loan  Bureaus  is  to  be  brought  to 
general  attention  over  the  names  of  the  Imperial  representa- 
tive and  the  members  of  the  Board  of  Directors  through  the 
journals  designated  for  official  notices. 

15.  Two  of  the  members  of  the  Board  of  Directors  chosen 
from  the  commercial  or  industrial  classes  shall,  in  alternate 
weeks,  manage  the  business  of  the  Loan  Bureaus  and  see 
that  the  provisions  of  this  A<3t  are  observed. 

16.  The  Imj^erial  rej^resentative  must  keep  informed  of  the 
whole  business  of  the  Bureau  and  has  a  right  of  veto  upon 
all  applications  for  loans.  The  determination  of  the  reduction 
to  be  made  from  the  current  or  market  price  of  the  securities 
pledged,  within  the  limits  set  by  the  regulations  of  the  busi- 
ness, rests  with  the  imperial  representatives  after  receiving  the 
advice  of  the  Board  of  Directors. 

17.  The  profits  of  the  Loan  Bureaus,  after  deducting  the 
expenses  of  administration,  shall  be  applied  to  covering  any 
possible  losses  and  to  the  future  redemption  of  the  notes  of 
the  Bureaus.  Any  possible  surplus  goes  to  the  Imperial 
Treasury. 

18.  The  notes  of  the  Loan  Bureaus  shall  be  issued  in 
denominations  of  5,  10,  20,  and  50  marks.  The  issue  of  larger 
denominations  of  the  notes,  and  the  proportions  in  Avhich 
the  various  denominations  are  to  be  used,  will  be  detennined 
by  the  regulations  of  the  Imperial  Chancellor.  [Under  this 
provision,  and  by  Act  of  August  31,  1914,  denominations  of 
1  and  2  marks  were  issued.] 

435 


WAR  COSTS  AND  THEIR  FINANCING 

The  notes  of  the  Loan  Bureaus  shall  be  issued  by  the 
Administration  of  the  Imperial  Debt  {Reichsschuldenver- 
waltung),  within  the  maximum  limits  (paragi*aph  2,  part  3), 
according  to  the  orders  of  the  Imperial  Chancellor  given  to 
the  Administration-in-Chief  of  the  Loan  Bureaus,  which 
assumes  the  responsibility  for  the  issue. 

The  control  over  the  preparation  and  issue  of  the  notes  of 
the  Loan  Bureaus  is  exercised  bj^  the  Commission  on  the 
Imperial  Debt. 

The  Imperial  Chancellor  is  to  make  iiublic  monthly  the 
amount  of  the  notes  of  the  Loan  Bureaus  outstanding. 

19.  As  soon  as  the  need  for  a  Loan  Bureau  no  longer 
exists,  the  Imperial  Chancellor  is  to  close  it  up  and  make 
public  the  fact. 

On  the  return  of  peace,  the  notes  of  the  Loan  Bureaus, 
issued  by  virtue  of  this  Act,  shall  be  withdrawn  according  to 
the  detailed  instructions  of  the  Federal  Council. 

20.  [Paragraphs  146-149,  151,  152  and  360,  Numbers  4-6, 
of  the  criminal  law  api:)ly  to  these  notes.] 

21.  The  advances  on  securities  (Lombards)  granted  by  the 
Reiehsbank,  in  the  period  from  August  3,  1914,  to  the  estab- 
lishment of  the  Loan  Bureaus,  on  other  securities  than  those 
mentioned  in  paragraph  13,  No.  3,  of  the  Bank  Act  (March 
14,  1875),  are  hereby  ratified. 

22.  This  law  goes  into  effect  on  the  day  of  its  jDromulgation. 


APPENDIX  IV 


liberty  bond  acts 

First  Liberty  Bond  Act 

An  Act  To  authorize  an  issue  of  bonds  to  meet  expenditures  for 
the  -national  security  and  defense,  and,  for  the  purpose  of 
assisting  in  the  prosecution  of  the  war,  to  extend  credit  to 
foreign  governments,  and  for  other  purposes. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives 
of  the  United  States  of  America  in  Congress  assembled,  That 
the  Secretary  of  the  Treasury,  Avith  the  approval  of  the 
President,  is  hereby  authorized  to  borrow,  from  time  to  time, 
on  the  credit  of  the  United  States  for  the  purposes  of  this 
Act,  and  to  meet  expenditures  authorized  for  the  national 
security  and  defense  and  other  i)ublic  purposes  authorized 
by  law  not  exceeding  in  the  aggregate  $5,000,000,000,  exclusive 
of  the  sums  authorized  by  section  four  of  this  Act,  and  to 
issue  therefor  bonds  of  the  United  States. 

The  bonds  herein  authorized  shall  be  in  such  form  and  sub- 
ject to  such  terms  and  conditions  of  issue,  conversion,  redemp- 
tion, maturities,  payment,  and  rate  and  time  of  payment  of 
interest,  not  exceeding  three  and  one-half  per  centum  per 
annum,  as  the  Secretary  of  the  Treasury  may  prescribe.  The 
principal  and  interest  thereof  shall  be  payable  in  United 
States  gold  coin  of  the  present  standard  of  value  and  shall 
be  exempt,  both  as  to  principal  and  interest,  from  all  taxation, 
except  estate  or  inheritance  taxes,  imposed  by  authority  of 
the  United  States,  or  its  possessions,  or  by  any  State  or 
local  taxing  authority;  but  such  bonds  shall  not  bear  the 
circulation  privilege. 

The  bonds  herein  authorized  shall  first  be  offered  at  not  loss 
than  par  as  a  popular  loan,  under  such  regulations  lorescnbod 
by  the  Secretary  of  the  Treasury  as  will  give  all  citizens  of 
the  United  States  an  equal  opportunity  to  participate  therein ; 
and  any  portion  of  the.  bonds  so  offered  and  not  subscribed 

437 


WAR  COSTS  AND  THEIR  FINANCING 

ior  may  be  otherwise  disposed  of  at  not  less  than  par  by 
the  Secretary  of  the  Treasury;  but  no  commissions  shall  be 
allowed  or  paid  on  any  bonds  issued  under  authority  of  this 
Act. 

Sec.  2,  That  for  the  purpose  of  more  effectually  providing 
foe  the  national  security  and  defense  and  i^rosecuting  the 
war  by  establishing  credits  in  the  United  States  for  foreign 
governments,  the  Secretary  of  the  Treasur}^,  with  the  approval 
of  the  President,  is  hereby  authorized,  on  behalf  of  the  United 
States,  to  purchase,  at  par,  from  such  foreign  governments 
then  engaged  in  Avar  with  the  enemies  of  the  United  States, 
their  obligations  hereafter  issued,  bearing  the  same  rate  of 
interest  and  containing  in  their  essentials  the  same  terms 
and  conditions  as  those  of  the  United  States  issued  under 
authority  of  this  Act;  to  enter  into  such  arrangements  as 
may  be  necessary  or  desirable  for  establishing  such  credits 
and  for  purchasing  such  obligations  of  foreign  governments 
and  for  the  subsequent  payment  thereof  before  maturity,  but 
such  arrangements  shall  provide  that  if  any  of  the  bonds 
of  the  United  States  issued  and  used  for  the  purchase  of  such 
foreign  obligations  shall  thereafter  be  converted  into  other 
bonds  of  the  United  States  bearing  a  higher  rate  of  interest 
than  three  and  one-half  per  centum  per  annum  under  the 
provisions  of  section  five  of  this  Act,  then  and  in  that  event 
the  obligations  of  such  foreign  governments  held  by  the 
United  States  shall  be,  by  such  foreign  governments,  converted 
in  like  manner  and  extent  into  obligations  bearing  the  same 
rate  of  interest  as  the  bonds  of  the  United  States  issued 
under  the  provisions  of  section  five  of  this  Act.  For  the 
purposes  of  this  section  there  is  appropriated,  out  of  any 
money  in  the  Treasury  not  othei-^vise  appropriated,  the  sum 
of  $3,000,000,000,  or  so  much  thereof  as  may  be  necessary: 
Provided,  That  the  authority  granted  by  this  section  to  the 
Secretary  of  the  Treasury  to  purchase  bonds  from  foreign 
governments,  as  aforesaid,  shall  cease  upon  the  termination 
of  the  war  between  the  United  States  and  the  Imperial  German 
Government, 

Sec.  3.  That  the  Secretary  of  the  Treasury,  under  such 
terms  and  conditions  as  he  may  prescribe,  is  hereby  aiithorized 
to  receive  on  or  before  maturity  payment  for  any  obligations 
of  such   foreign   governments    purchased   on   behalf   of  the 

438 


LIBERTY  BOND  ACTS 

United  States,  and  to  sell  at  not  less  than  tlie  purchase  price 
any  of  such  obligations  and  to  apply  the  proceeds  thereof, 
and  any  pajaiients  made  by  foreign  governments  on  account 
of  their  said  obligations  to  the  redemption  or  purchase  at  not 
more  than  par  and  accrued  interest  of  any  bonds  of  the  United 
States  issued  under  authority  of  this  Act;  and  if  such  bonds 
are  not  available  for  this  jiurpose  the  Secretaiy  of  the  Treas- 
ury shall  redeem  or  i^urehase  any  other  outstanding  interest- 
bearing  obligations  of  the  United  States  Avhich  may  at  such 
time  be  subject  to  call  or  which  may  be  purchased  at  not 
more  than  par  and  accmed  interest. 

Sec.  4.  That  the  Secretaiy  of  the  Treasury,  in  his  dis- 
cretion, is  hereby  authorized  to  issue  the  bonds  not  already 
issued  heretofore  authorized  by  section  thirty-nine  of  the 
Act  api^roved  August  fifth,  nineteen  hundred  and  nine, 
entitled  ''  An  Act  to  provide  revenue,  equalize  diities,  and 
encourage  the  industries  of  the  United  States,  and  for  other 
purposes  " ;  section  one  hundred  and  twenty-four  of  the  Act 
approved  June  third,  nineteen  hundred  and  sixteen,  entitled 
"  An  Act  for  making  further  and  more  effectual  provision 
for  the  national  defense,  and  for  other  purposes  " ;  section 
thirteen  of  the  Act  of  September  seventh,  nineteen  hundred 
and  sixteen,  entitled  "  An  Act  to  establish  a  United  States 
shipping  board  for  the  purpose  of  encouraging,  developing, 
and  creating  a  naval  auxiliary^  and  a  naval  reserv^e  and  a 
merchant  marine  to  meet  the  requirements  of  the  commerce 
of  the  United  States  with  its  Territories  and  possessions  and 
with  foreign  countries,  to  regulate  carriers  by  Avater  engaged 
in  the  foreign  and  interstate  commerce  of  the  United  States, 
and  for  other  purposes  " ;  section  four  hundred  of  the  Act 
approved  March  third,  nineteen  hundred  and  seventeen, 
entitled  "  An  Act  to  provide  increased  revenue  to  defray  the 
expenses  of  the  increased  appropriations  for  the  Army  and 
Navy  and  the  extensions  of  fortifications,  and  for  other  pur- 
poses " ;  and  the  public  resolution  approved  March  fourth, 
nineteen  hundred  and  seventeen,  entitled  "  Joint  resolution 
to  expedite  the  delivery  of  materials,  equipment,  and  munitions 
and  secure  more  expeditious  construction  of  ships,"  in  the 
manner  and  under  the  terms  and  conditions  pi-escribed  in 
section  one  of  this  Act. 

That  the  Secretary  of  the  Treasurj^  is  hereby  authorized  to 
439 


WAR  COSTS  AND  THEIR  FINANCING 

borrow  on  the  credit  of  the  United  States  from  time  to  time, 
in  addition  to  the  sum  authorized  in  section  one  of  this  Act, 
such  additional  amount,  not  exceeding  $63,945,400  as  may  be 
necPisary  to  redeem  the  three  per  cent,  loan  of  nineteen 
hundred  and  eight  to  nineteen  hundred  and  eighteen,  maturing 
August  first,  nineteen  hundred  and  eighteen,  and  to  issue 
therefor  bonds  of  the  United  States  in  the  manner  and  under 
the  terms  and  conditions  prescribed  in  section  one  of  this  Act. 

Sec.  5.  That  any  series  of  bonds  issued  under  authority 
of  sections  one  and  four  of  this  Act  may,  under  such  tenns 
and  conditions  as  the  Secretary  of  the  Treasury  may  prescribe, 
be  convertible  into  bonds  bearing  a  higher  rate  of  interest 
than  the  rate  at  Avhich  the  sama  were  issued  if  an}'  subsequent 
series  of  bonds  shall  be  issued  at  a  higher  rate  of  interest 
before  the  termination  of  the  war  between  the  United  States 
and  the  Imperial  German  Government,  the  date  of  such  ter- 
mination to  be  fixed  by  a  proclamation  of  the  President  of 
the  United  States. 

Sec.  6.  That  in  addition  to  the  bonds  authorized  by  sec- 
tions one  and  four  of  this  Act,  the  Secretary  of  the  Treasury 
is  authorized  to  borrow  from  time  to  time,  on  the  credit  of 
the  United  States,  for  the  purposes  of  this  Act  and  to  meet 
public  expenditures  authorized  by  law,  such  sum  or  sums  as, 
in  his  judgment,  maj'  be  necessary,  and  to  issue  therefor 
certificates  of  indebtedness  at  not  less  than  par  in  such  form 
and  subject  to  such  terms  and  conditions  and  at  such  rate 
of  interest,  not  exceeding  three  and  one-half  per  centum  per 
annum,  as  he  may  prescribe;  and  each  certificate  so  issued 
shall  be  paj^able,  with  the  interest  accrued  thereon,  at  such 
time,  not  exceeding  one  year  from  the  date  of  its  issue,  as 
the  Secretary  of  the  Treasury  may  prescribe.  Certificates  of 
indebtedness  herein  authorized  shall  not  bear  the  circulation 
privilege,  and  the  sum  of  such  certificates  outstanding  shall 
at  no  time  exceed  in  the  aggregate  $2,000,000,000,  and  such 
certificates  shall  be  exempt,  both  as  to  principal  and  interest, 
from  all  taxation,  except  estate  or  inheritance  taxes,  imposed 
by  authority  of  the  United  States,  or  its  possessions,  or  by 
any  State  or  local  taxing  authority. 

Sec.  7.  That  the  Secretary  of  the  Treasury,  in  his  discre- 
tion, is  hereby  authorized  to  deposit  in  such  banks  and  trust 
companies  as  he  may  designate  the  proceeds,   or  any  part 

440 


LIBERTY  BOND  ACTS 

thereof,  arising  from  the  sale  of  the  bonds  and  certificates  of 
indebtedness  authorized  by  this  Act,  or  the  bonds  previously 
authorized  as  described  in  section  four  of  this  Act,  and  such 
deposits  may  bear  such  rate  of  interest  and  be  subject  to 
such  terms  and  conditions  as  the  Secretary  of  the  Treasury 
n\ay  prescribe :  Provided,  That  the  amount  so  deposited  shall 
not  in  any  case  exceed  the  amount  withdrawn  from  any  such 
bank  or  trust  com j) any  and  invested  in  svich  bonds  or  certifi- 
cates of  indebtedness  plus  the  amount  so  invested  bj^  such 
bank  or  trust  company,  and  such  deposits  shall  be  secured  in 
the  manner  required  for  other  deposits  by  section  fifty-one  hun- 
dred and  fifty-three.  Revised  Statutes,  and  amendments  thereto : 
Provided  further,  That  the  provisions  of  section  fifty-one 
hundred  and  ninety-one  of  the  Revised  Statutes,  as  amended 
by  the  Federal  Reserve  Act  and  the  amendments  thereof,  with 
reference  to  the  reserves  required  to  be  kept  by  national 
banking  associations  and  other  member  banks  of  the  Federal 
Reserve  System,  shall  not  appl}^  to  deposits  of  public  moneys 
by  the  United  States  in  designated  depositaries. 

Sec.  8.  That  in  order  to  pay  all  necessarj^  expenses,  includ- 
ing rent,  connected  with  any  oi^erations  under  this  Act,  a  sum 
not  exceeding  one-tenth  of  one  per  centum  of  the  amount  of 
bonds  and  one-tenth  of  one  per  centum  of  the  amount  of 
certificates  of  indebtedness  herein  authorized  is  hereby  appro- 
priated, or  as  much  thereof,  as  may  be  necessary,  out  of  any 
money  in  the  Treasury  not  otherwise  appropriated,  to  be 
expended  as  the  Secretary  of  the  Treasury  may  direct:  Pro- 
vided, That,  in  addition  to  the  reports  now  required  by  law, 
the  Secretary  of  the  Treasury  shall,  on  the  first  Monday  in 
December,  nineteen  hundred  and  seventeen,  and  annually 
thereafter,  transmit  to  the  Congress  a  detailed  statement  of 
all  expenditures  under  this  Act. 

AjDproved,  April  24,  1917. 


WAR  COSTS  AND  THEIR  FINANCING 

Second  Liberty  Bond  Act 

An  Act  To  authorize  an  additional  issue  of  bonds  to  meet 
expenditures  for  the  national  security  and  defense,  and,  for 
the  purpose  of  assisting  in  the  prosecution  of  the  war, 
to  extend  additional  credit  to  foreign  Governments,  and 
for  other  purposes. 

Be  it  enacted  hy  the  Senate  and  House  of  Representatives 
of  the  United  States  of  America  in  Congress  assembled,  That 
the  Secretary  of  the  Treasury,  with  the  approval  of  the 
President,  is  hereby  authorized  to  borrow,  from  time  to  time, 
on  the  credit  of  the  United  States  for  the  purposes  of  this 
Act,  and  to  meet  expenditures  authorized  for  the  national 
security  and  defense  and  other  public  purposes  authorized 
by  law,  not  exceeding  in  the  aggregate  $7,538,945,460,  and 
to  issue  therefor  bonds  of  the  United  States,  in  addition  to 
the  $2,000,000,000  bonds  already  issued  or  offered  for  sub- 
scription under  authority  of  the  Act  approved  April  twenty- 
fourth,  nineteen  hundred  and  seventeen,  entitled  "  An  Act  to 
authorize  an  issue  of  bonds  to  meet  expenditures  for  the 
national  security  and  defense,  and,  for  the  purpose  of  assist- 
ing in  the  prosecution  of  the  war,  to  extend  credit  to  foreign 
governments,  and  for  other  pur2:)0ses  ";  Provided,  That  of 
this  sura  $3,063,945,460  shall  be  in  lieu  of  that  amount  of  the 
unissued  bonds  authorized  by  sections  one  and  four  of  the 
Act  approved  Ai)ril  twentj^-fourth,  nineteen  hundred  and 
seventeen,  $225,000,000  shall  be  in  lieu  of  that  amount  of  the 
unissued  bonds  authorized  by  section  thirty-nine  of  the  Act 
approved  Augvist  fifth,  nineteen  hixndred  and  nine,  $150,000,- 
000  shall  be  in  lieu  of  the  unissued  bonds  authorized  by  the 
joint  resolution  approved  March  fourth,  nineteen  hundred 
and  seventeen,  and  $100,000,000  shall  be  in  lieu  of  the  unissued 
bonds  authorized  by  section  four  hundred  of  the  Act  approved 
March  third,  nineteen  hundred  and  seventeen. 

The  bonds  herein  authorized  shall  be  in  such  form  or  forms 
and  denomination  or  denominations  and  subject  to  such  terms 
and  conditions  of  issue,  conversion,  redemption,  maturities, 
l)ayment,  and  rate  or  rates  of  interest,  not  exceeding  four 
per  centum  per  annum,  and  time  or  times  of  pajnnent  of 
interest,  as  the  Secretarj^  of  the  Treasury  from  time  to  time 
at  or  before  the  issue  thereof  may  prescribe.     The  principal 

442 


LIBERTY  BOND  ACTS 

and  interest  thereof  shall  be  payable  in  United  States  gold 
coin  of  the  present  standard  of  value. 

The  bonds  herein  authorized  shall  from  time  to  time  first 
be  offered  at  not  less  than  par  as  a  popular  loan,  under  such 
regulations,  prescribed  by  the  Secretary  of  the  Treasury  from 
time  to  time,  as  will  in  his  ojiinion  give  the  jjeoj^le  of  the 
United  States  as  nearly  as  may  be  nn  equal  ojiportunity  to 
partieijiate  therein,  but  he  may  make  allotment  in  full  upon 
applications  for  smaller  amounts  of  bonds  in  advance  of  any 
date  which  he  may  set  for  the  closing  of  subscriptions  and 
may  reject  or  reduce  allotments  upon  later  applications  and 
applications  for  larger  amounts,  and  may  reject  or  reduce 
allotments  upon  applications  from  incorporated  banks  and 
trust  companies  for  their  own  account  and  make  allotment  in 
full  or  larger  allotments  to  others,  and  may  establish  a  gradu- 
ated scale  of  allotments,  and  maj^  from  time  to  time  adopt  any 
or  all  of  said  methods,  should  any  such  action  be  deemed  by 
him  to  be  in  the  public  interest :  Provided,  That  such  reduction 
or  increase  of  allotments  of  such  bonds  shall  be  made  under 
general  rules  to  be  prescribed  by  said  Secretary  and  shall 
apply  to  all  subscribers  similarlj^  situated.  And  any  portion 
of  the  bonds  so  offered  and  not  taken  may  be  otherwise  dis- 
posed of  by  the  Seeretarj^  of  the  Treasury  in  such  manner 
and  at  such  price  or  prices,  not  less  than  par,  as  he  may 
determine. 

Sec.  2.  That  for  the  purpose  of  more  effectually  providing 
for  the  national  security  and  defense  and  prosecuting  the 
war,  the  Secretary  of  the  Treasury,  with  the  approval  of  the 
President,  is  hereby  authorized,  on  behalf  of  the  United  States, 
to  establish  credits  Avith  the  United  States  for  any  foreign 
governments  then  engaged  in  war  with  the  enemies  of  the 
United  States  and,  to  the  extent  of  the  credits  so  established 
from  time  to  time,  the  Secretary  of  the  Treasury  is  hereby 
authorized  to  purchase,  at  par,  from  such  foreign  governments 
respectively  their  several  obligations  hereafter  issued,  bearing 
such  rate  or  rates  of  interest,  maturing  at  such  date  or  dates, 
not  later  than  the  bonds  of  the  United  States  then  last  issued 
under  the  authority  of  this  Act,  or  of  such  Act  approved 
April  twenty-fourth,  nineteen  hundred  and  seventeen,  and  con- 
taining such  terms  and  conditions  as  the  Secretaiy  of  the 
Treasurj'^   mav   from   time   to    time    determine,   or   to    make 

443 


WAR  COSTS  AND  THEIR  FINANCING 

advances  to  or  for  the  account  of  any  such  foreign  govern- 
ments and  to  receive  such  obligations  at  par  for  the  amount 
of  any  such  advances;  but  the  rate  or  rates  of  interest  borne 
by  any  such  obligations  shall  not  be  less  than  the  highest 
rate  borne  by  any  bonds  of  the  United  States  which,  at  the 
time  of  the  acquisitit..i  thereof,  shall  have  been  issued  under 
authority  of  said  Act  approved  April  twenty-fourth,  nineteen 
hundred  and  seventeen,  or  of  this  Act,  and  any  such  obliga- 
tions shall  contain  such  provisions  as  the  Secretary  of  the 
Treasury  may  from  time  to  time  determine  for  the  conversion 
of  a  i^roportionate  part  of  such  obligations  into  obligations 
bearing  a  higher  rate  of  interest  if  bonds  of  the  United  States 
issued  under  authority  of  this  Act  shall  be  converted  into 
other  bonds  of  the  United  States  bearing  a  higher  rate  of 
interest,  but  the  rate  of  interest  in  such  foreign  obligations 
issued  upon  such  conversion  shall  not  be  less  than  the  highest 
rate  of  interest  borne  by  such  bonds  of  the  United  States ;  and 
the  Secretary  of  the  Treasury  with  the  approval  of  the  Presi- 
dent, is  hereby  authorized  to  enter  into  such  arrangements 
from  time  to  time  with  any  such  foreign  Governments  as  may 
be  necessary  or  desirable  for  establishing  such  credits  and  for 
the  payment  of  such  obligations  of  foreign  Governments  be- 
fore maturity.  For  the  purposes  of  this  section  there  is 
appropriated,  out  of  any  money  in  the  Treasury  not  other- 
wise appropriated,  the  sum  of  $4,000,000,000,  and  in  addition 
thereto  the  unexpended  balance  of  the  appropriations  made 
by  section  two  of  said  Act  approved  April  twenty-fourth, 
nineteen  hundred  and  seventeen,  or  so  much  thereof  as  may 
be  necessary:  Provided,  That  the  authority  gi'anted  by  this 
section  to  the  Secretary  of  the  Treasury  to  establish  credits 
for  foreign  Governments,  as  aforesaid,  shall  cease  upon  the 
termination  of  the  war  between  the  United  States  and  the 
Imperial  German  Government. 

Sec.  3.  That  the  Secretary  of  the  Treasurj''  is  hereby 
authorized,  from  time  to  time,  to  exercise  in  respect  to  any 
obligations  of  foreign  governments  acquired  under  authority 
of  this  Act  or  of  said  Act  approved  April  twenty-fourth, 
nineteen  hundred  and  seventeen,  any  privilege  of  conversion 
into  obligations  bearing  interest  at  a  higher  rate  provided  for 
in  or  pursuant  to  this  Act  or  said  Act  approved  April  twenty- 
fourth,  nineteen  hundred  and  seventeen,  and  to  convert  any 

444 


LIBERTY  BOND  ACTS 

short  time  obligations  of  foreigTi  governments  which  may  have 
been  j)urchased  under  the  authorit}'  of  this  Act  or  of  said  Act 
approved  April  twenty-fourth,  nineteen  hundred  and  seven- 
teen, into  long  time  obligations  of  such  foreign  governments, 
respectively,  maturing  not  later  than  the  bonds  of  the  United 
States  then  last  issued  under  the  authority  of  this  Act  or  of 
said  Act  approved  April  twenty-fourth,  nineteen  hundred  and 
seventeen,  as  the  case  may  be,  and  in  such  form  and  terms  as 
the  Seeretarj-  of  the  Treasury  maj'  prescribe;  but  the  rate  or 
rates  of  interest  borne  by  any  such  long-time  obligations  at 
the  time  of  their  acquisition  shall  not  be  less  than  the  rate 
borne  l^y  the  short  time  obligations  so  converted  into  such 
long  time  obligations;  and,  under  such  terms  and  conditions 
as  he  may  from  time  to  time  prescribe,  to  receive  payment,  on 
or  before  maturity,  of  any  obligations  of  such  foreign 
governments  acquired  on  behalf  of  the  United  States  under 
authority  of  this  Act  or  of  said  Act  approved  April  twenty- 
fourlh,  nineteen  hundred  and  seventeen,  and,  with  the  approval 
of  the  President,  to  sell  any  of  such  obligations  (but  not  at 
less  than  the  purchase  price  with  accrued  interest  unless  other- 
wise hereafter  provided  by  law),  and  to  apply  the  i)roceeds 
thereof,  and  any  payments  so  received  from  foreign  govern- 
ments on  account  of  the  principal  of  their  said  obligations,  to 
the  redemption  or  purchase,  at  not  more  than  j^ar  and  accrued 
interest,  of  any  bonds  of  the  United  States  issued  under 
authority  of  this  Act  or  of  said  Act  approved  April  twenty- 
fourth,  nineteen  hundred  and  seventeen,  and  if  such  bonds 
cannot  be  so  redeemed  or  purchased  the  Secretary  of  the 
Treasuiy  shall  redeem  or  purchase  any  other  outstanding 
interest-bearing  obligations  of  the  United  States  which  may  at 
such  time  be  subject  to  redemption  or  which  can  be  purchased 
at  not  more  than  par  and  accrued  interest. 

Seo.  4.  That  in  connection  with  the  issue  of  any  series 
of  bonds  under  the  authority  of  section  one  of  this  Act  the 
Secretary  of  the  Treasury  may  determine  that  the  bonds  of 
such  series  shall  be  convertible  as  provided  in  or  pursuant  to 
this  section,  and,  in  any  such  case,  he  may  make  appropriate 
provision  to  that  end  in  offering  for  subscription  the  bonds 
of  such  series  (hereinafter  called  convertible  bonds).  In  any 
case  of  the  issue  of  a  series  of  convertible  bonds,  if  a  subse- 
quent series  of  bonds  (not  including  United  States  certificates 

445 


WAR  COSTS  AND  THEIR  FINANCING 

of  indebtedness,  war  savings  certificates,  and  otlier  obligations 
maturing  not  more  tlian  live  years  from  tlie  issue  of  such 
obligations,  respectively)  bearing  interest  at  a  higher  rate 
shall,  under  the  authority  of  this  or  any  other  Act,  be  issued 
by  the  United  States  before  the  termination  of  the  war  between 
the  United  States  and  the  Imi^erial  German  Government,  then 
the  holders  of  such  convertible  bonds  shall  have  the  privilege, 
at  the  option  of  the  several  holders,  at  any  time  within  such 
period,  after  the  pvablic  offering  of  bonds  of  such  subsequent 
series,  and  under  such  rules  and  regulations  as  the  Secretary 
of  the  Treasury  shall  have  prescribed,  of  converting  their 
bonds,  at  par,  into  bonds  bearing  such  higher  rate  of  interest 
at  such  price  not  less  than  par  as  the  Secretary  of  the  Treas- 
ury shall  have  prescribed.  The  bonds  to  be  issued  upon  such 
conversion  under  this  Act  shall  be  substantially  the  same 
in  form  and  terms  as  shall  be  prescribed  by  or  pursuant  to 
law  with  respect  to  the  bonds  of  such  subsequent  series,  not 
only  as  to  interest  rate  bixt  also  as  to  convertibility  (if  future 
bonds  be  issued  at  a  still  higher  rate  of  interest)  or  noneon- 
vertibility,  and  as  to  exemi^tion  from  taxation,  if  any,  and  in 
all  other  resjiects,  except  that  the  bonds  issued  upon  such 
conversion  shall  have  the  same  dates  of  maturity,  of  principal, 
and  of  interest,  and  be  subject  to  the  same  terms  of  redemp- 
tion before  maturity,  as  the  bonds  converted;  and  such  bonds 
shall  be  issued  from  time  to  time  if  and  Avhen  to  the  extent 
that  the  jDrivilege  of  conversion  so  conferred  shall  arise  and 
shall  be  exercised.  If  the  privilege  of  conversion  so  conferred 
under  this  Act  shall  once  arise,  and  shall  not  be  exercised  with 
respect  to  any  convertible  bonds  Avithin  the  period  so  pre- 
scribed by  the  Secretary  of  the  Treasury,  then  such  privilege 
shall  terminate  as  to  such  bonds  and  shall  not  arise  again 
though  again  thereafter  bonds  be  issued  bearing  interest  at  a 
higher  rate  or  rates. 

Sec.  5.  That  in  addition  to  the  bonds  authorized  by  section 
one  of  this  Act  the  Secretary  of  the  Treasury'  is  authorized 
to  borrow  from  time  to  time,  on  the  credit  of  the  United 
States,  for  the  j^urpose  of  this  Act  and  to  meet  public  ex- 
penditures authorized  by  law,  such  sum  or  sums  as  in  his 
judgment  may  be  necessary,  and  to  issue  therefor  certificates 
of  indebtedness  of  the  United  States  at  not  less  than  par  in 
such  form  or  forms  and  subject  to  such  terms  and  conditions 

446 


LIBERTY  BOND  ACTS 

and  at  such  rate  or  rates  of  interest  as  lie  may  prescribe;  and 
each  certificate  so  issued  shall  be  payable  at  such  time  not 
exceeding  one  year  fi'om  the  date  of  its  issue,  and  may  be 
redeemable  before  maturity  upon  such  terms  and  conditions, 
and  the  interest  accruing  thereon  shall  be  paj'able  at  such 
time  or  times  as  the  Secretary  of  the  Treasury  may  prescribe. 
The  sum  of  such  certificates  outstanding  hereunder  and  under 
section  six  of  said  Act  aiDproved  April  twenty-fourth,  nineteen 
hundred  and  seventeen,  shall  not  at  any  one  time  exceed  in 
the  aggregate  $4,000,000,000. 

Sec.  6.  That  in  addition  to  the  bonds  authorized  by  section 
one  of  this  Act  and  the  certificates  of  indebtedness  authorized 
by  section  five  of  this  Act,  the  Secretary  of  the  Treasury  is 
authorized  to  borrow  from  time  to  time,  on  the  credit  of  the 
United  States,  for  the  purposes  of  this  Act  and  to  meet 
public  expenditures  authorized  by  law,  such  sum  or  sums  as 
in  his  judgment  may  be  necessary,  and  to  issue  therefor,  at 
such  price  or  jDrices  and  uj^on  such  terms  and  conditions  as 
he  may  determine,  war-savings  certificates  of  the  United  States 
on  which  interest  to  maturity  maj'  be  discounted  in  advance  at 
such  rate  or  rates  and  computed  in  such  manner  as  he  may 
prescribe.  Such  war-savings  certificates  shall  be  in  such  form 
or  forms  and  subject  to  such  terms  and  conditions,  and  may 
have  such  jjrovisions  for  payment  thereof  before  maturity,  as 
the  Secretary  of  the  Treasury  may  prescribe.  Each  war- 
saving  certificate  so  issued  shall  be  payable  at  such  time,  not 
exceeding  five  years  from  the  date  of  its  issue,  and  may  be 
redeemable  before  maturity,  upon  such  terms  and  conditions 
as  the  Secretary  of  the  Treasury  may  prescribe.  The  sum 
of  such  war-savings  certificates  outstanding  shall  not  at  any 
one  time  exceed  in  the  aggregate  $2,000,000,000.  The  amount 
of  war-savings  certificates  sold  to  any  one  person  at  any 
one  time  shall  not  exceed  $100,  and  it  shall  not  be  lawful 
for  any  one  person  at  any  one  time  to  hold  war-savings 
certificates  to  an  aggregate  amount  exceeding  $1,000.  The 
Secretary  of  the  Treasury  may,  under  such  regulations  and 
upon  such  terms  and  conditions  as  he  may  j'lrescribe,  issue, 
or  cause  to  be  issued,  stamps  to  evidence  payments  for  or  on 
accoixnt  of  such  certificates. 

Sec.  7.  That  none  of  the  bonds  authorized  by  section  one, 
nor  of  the  certificates  authorized  ])V  section  five,  or  bv  section 

447 


WAR  COSTS  AND  THEIR  FINANCING 

six,  of  this  Act,  shall  hear  the  circulation  jDrivilege.  All  such 
bonds  and  certificates  shall  be  exempt,  both  as  to  principal 
and  interest  from  all  taxation  now  or  hereafter  imposed  by 
the  United  States,  any  State,  or  any  of  the  possessions  of  the 
United  States,  or  by  any  local  taxing  authority,  except  (a) 
estate  or  inheritance  taxes,  and  (b)  graduated  additional 
income  taxes,  commonly  known  as  surtaxes,  and  excess  profits 
and  war-profits  taxes,  now  or  hereafter  imposed  by  the  United 
States,  upon  the  income  or  profits  of  individuals,  partner- 
ships, associations,  or  corporations.  The  interest  on  an 
amount  of  such  bonds  and  certificates  the  i^rincijoal  of  which 
does  not  exceed  in  the  aggregate  $5,000,  owned  by  any  indi- 
vidual, partnership,  association,  or  corporation,  shall  be 
exempt  from  the  taxes  provided  for  in  subdivision  (b)  of  this 
section. 

Sec.  8.  That  the  Secretary  of  the  Treasury,  in  his  dis- 
cretion is  hereby  authorized  to  deposit,  in  such  incorporated 
banks  and  trust  companies  as  he  may  designate,  the  proceeds, 
or  any  part  thereof,  arising  from  the  sale  of  the  bonds  and 
certificates  of  indebtedness  and  Avar-savings  certificates  author- 
ized by  this  Act,  and  such  deposits  shall  bear  such  rate  or 
rates  of  interest,  and  shall  be  secured  in  such  manner,  and 
shall  be  made  upon  and  subject  to  such  terms  and  conditions, 
as  the  Secretary  of  the  Treasury  may  from  time  to  time 
prescribe :  Provided,  That  the  provisions  of  section  fifty-one 
hundred  and  ninety-one  of  the  Revised  Statutes,  as  amended 
by  the  Federal  Reserve  Act,  and  the  amendments  thereof, 
with  reference  to  the  reserves  recpired  to  be  kept  by  national 
banking  associations  and  other  member  banks  of  the  Federal 
Reserve  System,  shall  not  apply  to  deposits  of  public  moneys 
by  the  United  States  in  designated  depositaries.  The  Secre- 
tary of  the  Treasury  is  hereby  authorized  to  designate  de- 
positaries in  foreign  countries,  with  which  shall  be  deposited 
all  public  money  Avhieh  it  may  be  necessary  or  desirable  to 
have  on  deposit  in  svich  countries  to  provide  for  cuiTent 
disbursements  to  the  military  and  naval  forces  of  the  United 
States  and  to  the  diplomatic  and  consular  and  other  repre- 
sentatives of  the  United  States  in  and  about  such  countries 
until  six  months  after  the  termination  of  the  war  between 
the  United  States  and  the  Imperial  German  Government,  and 
to  prescribe  the  terms  and  conditions  of  such  deposits. 

448 


LIBERTY  BOND  ACTS 

Sec.  9.  That  in  connection  with  the  operations  of  advertis- 
ing, selling,  and  delivering  any  bonds,  certificates  of  indebted- 
ness, or  war-sa\dngs  certificates  of  the  United  States  provided 
for  in  this  Act,  the  Postmaster  General,  under  such  regv;la- 
tions  as  he  may  prescribe,  shall  require,  at  the  request  of  the 
Secretaiy  of  the  Treasury,  the  employees  of  the  Post  Office 
Department  and  of  the  Postal  Service  to  perform  such  services 
as  may  be  necessary,  desirable,  or  practicable,  without  extra 
compensation. 

Sec.  10.  That  in  order  to  pay  all  necessary  expenses, 
including  rent,  connected  with  any  operations  under  this  Act, 
except  section  twelve,  a  sum  not  exceeding  one-fifth  of  one 
per  centum  of  the  amount  of  bonds  and  war-savings  certificates 
and  one-tenth  of  one  per  centum  of  the  amount  of  certificates 
of  indebtedness  herein  authorized  is  hereby  appropriated,  or 
as  much  thereof  as  may  be  necessary,  out  of  any  money  in  the 
Treasuiy  not  otherwise  approjiriated,  to  be  expended  as  the  Sec- 
retary of  the  Treasury  may  direct:  Provided^  That  in  addition 
to  the  reports  now  required  by  law,  the  Secretary  of  the  Treas- 
ury shall,  on  the  first  Monday  in  December,  nineteen  hundred 
and  eighteen,  and  annually  thereafter,  transmit  to  the  Congress 
a  detailed  statement  of  all  expenditures  under  this  Act. 

Sec.  11.  That  bonds  shall  not  be  issued  under  authority 
of  sections  one  and  four  of  said  Act  approved  April  twenty- 
fourth,  nineteen  hundred  and  seventeen,  in  addition  to  the 
$2,000,000,000  thereof  heretofore  issued  or  offered  for  sub- 
scription, but  bonds  shall  be  issued  from  time  to  time  upon 
the  interchange  of  such  bonds  of  different  denominations  and 
of  coupon  and  registered  bonds  and  upon  the  transfer  of 
registered  bonds,  under  such  rules  and  regulations  as  the 
Secretary  of  the  Treasury  shall  prescribe,  and,  if  to  tlie 
extent  that  the  privilege  of  conversion  provided  for  in  such 
bonds  shall  arise  and  shall  be  exercised,  in  accordance  with 
such  provision  for  such  conversion.  No  bonds  shall  be  issued 
under  authority  of  the  several  sections  of  Acts  and  of  the 
resolution  mentioned  in  said  section  four  of  the  Act  approved 
April  twenty- fourth,  nineteen  hundred  and  seventeen;  but  the 
proceeds  of  the  bonds  herein  authorized  may  be  used  for 
purposes  mentioned  in  said  section  four  of  the  Act  of  April 
twenty- fourth,  nineteen  hundred  and  seventeen,  and  as  set 
forth  in  the  Acts  therein  enumerated. 

449 


WAR  COSTS  AND  THEIR  FINANCING 

That  section  two  of  an  Act  of  Congress  approved  February 
fourth,  nineteen  hundred  and  ten,  entitled  "  An  Act  prescrib- 
ing certain  provisions  and  conditions  under  which  bonds  and 
certificates  of  indebtedness  of  the  United  States  may  be  issued, 
and  for  other  puri^oses,"  is  hereby  amended  to  read  as  follows : 

"  Sec.  2.  That  any  certificates  of  indebtedness  hereafter 
issued  shall  be  exempt  from  all  taxes  cr  duties  of  the  United 
States  (but,  in  the  case  of  certificates  issued  after  Sei:)tember 
first,  nineteen  hundred  and  seventeen,  only  if  and  to  the 
extent  jn-ovided  in  connection  with  the  issue  thereof),  as  well 
as  from  taxation  in  any  form  by  or  under  State,  municipal, 
or  local  authority  and  that  a  sum  not  exceeding  one-tenth  of 
one  per  centum  of  the  amount  of  any  certificates  of  indebted- 
ness issued  is  hereby  appropriated,  out  of  any  money  in  the 
Treasury  not  otheinvise  appropriated,  to  pay  the  expenses  of 
preparing,  advertising,  and  issuing  the  same." 

Sec.  12.  That  the  Secretary  of  the  Treasury  is  authorized 
during  the  Avar,  whenever  it  shall  appear  that  the  iDublic 
irtcrests  require  that  any  of  the  accounts  of  the  Military 
Establishment  be  audited  at  any  place  other  than  the  seat 
of  Government,  to  direct  the  Comptroller  of  the  Treasury  and 
the  Auditor  for  the  War  Department  to  exercise,  either  in 
person  or  through  assistants,  the  powers  and  perform  the 
duties  of  their  offices  at  any  place  or  places  away  from  the 
seat  of  Government  in  the  manner  that  is  or  may  be  required 
by  law  at  the  seat  of  Government  and  in  accordance  with  the 
provisions  of  this  section. 

(a)  That  when  the  Secretary  of  the  Treasurj^  shall  exercise 
the  authority  herein  referred  to,  the  powers  and  duties  of  the 
said  comptroller  and  auditor,  under  and  pursuant  to  the  i^ro- 
visions  of  the  Act  of  July  thirty-first,  eighteen  hundred  and 
ninety-four,  and  all  other  laws  conferring  jurisdiction  upon 
those  officers,  shall  be  exercised  and  performed  in  the  same 
manner  as  nearly  as  practicable  and  with  the  same  effect 
away  from  the  seat  of  Government  as  they  are  now  exercised 
and  performed  and  have  effect  at  the  seat  of  Government,  and 
decisions  authorized  by  law  to  be  rendered  by  the  comptroller 
at  the  request  of  disbursing  officers  may  be  rendered  with  the 
same  effect  by  such  assistants  as  may  be  authorized  by  him 
to  perform  that  duty. 

(b)  That  Avhen  pursuant  to  this  section  the  said  comptroller 

450 


LIBERTY  BOND  ACTS 

and  auditor  shall  perform  their  duties  at  a  place  in  a  foreign 
country,  the  balances  arising  upon  the  settknnent  of  accounts 
and  claims  of  the  Military  Establishment  shall  be  certified  bj' 
the  auditor  to  the  Division  of  Bookkeeping  and  Warrants  of 
the  Treasury  Department  as  now  provided  for  the  certification 
of  balances  Iw  said  auditor  in  AVashington,  and  the  balances 
so  found  due  shall  be  final  and  conclusive  upon  all  branches 
of  the  Government,  except  that  any  jierson  whose  account 
has  been  settled  or  the  commanding  officer  of  the  Army 
abroad,  or  the  com2:)trollcr  may  obtain  a  revision  of  such 
settlement  by  the  comptroller  upon  application  therefor  within 
three  months,  the  decision  to  be  likewise  final  and  conclusive 
and  the  differences  arising  upon  such  revision  to  be  certified  to 
and  stated  by  the  auditor  as  now  provided  by  law:  Provided, 
That  certificates  of  balances  due  may  be  transmitted  to  and 
paid  by  the  proj^er  disbursing  officer  abroad  instead  of  by 
warrant :  Provided  further,  That  any  person  whose  account 
has  been  settled,  or  the  Secretary  of  War,  maj'^  obtain  a 
reopening  and  review  of  any  settlement  made  jaursuant  to 
this  section  upon  application  to  the  Comptroller  of  the  Treas- 
ury in  Washington  within  one  year  after  the  close  of  the 
war,  and  the  action  of  the  comptroller  thereon  shall  be  final 
and  conclusive  in  the  same  manner  as  herein  provided  in  the 
ease  of  a  balance  found  due  by  the  auditor. 

(c)  That  the  comptroller  and  auditor  shall  iDresorve  the 
accounts,  and  the  vouchers  and  papers  connected  therewith, 
and  the  files  of  their  offices  in  the  foreign  country  and  trans- 
mit them  to  Washington  within  six  months  after  the  close  of 
the  war  and  at  such  earlier  time  as  may  be  directed  b}^  the 
Secretary  of  the  Treasury  as  to  any  or  all  accounts,  vouchers, 
papers,  and  files. 

(d)  That  the  Secretary  of  the  Treasury  is  authorized  to 
appoint  an  assistant  comptroller  and  an  assistant  auditor  and 
to  fix  their  compensation,  and  to  designate  from  among  the 
persons  to  be  employed  hereunder  one  or  more  to  act  in  the 
absence  or  disability  of  such  assistant  comptroller  and  assist- 
ant auditor.  He  shall  also  prescribe  the  number  and  maximum 
compensation  to  be  paid  to  agents,  accountants,  clerks,  trans- 
lators, interpreters,  and  other  persons  who  may  be  employed 
in  the  work  under  this  section  by  the  comptroller  and  auditor. 
The  assistant  comptroller  and  assistant  auditor  shall  have  full 

451 


WAR  COSTS  AND  THEIR  FINANCING 

power  to  perform  in  a  foreign  country  all  the  duties  with 
reference  to  the  settlement  there  of  the  accounts  of  the 
Military  Establishment  that  the  comi^troller  and  auditor  now 
have  at  the  seat  of  Government  and  in  foreign  countries  under 
the  provisions  of  this  section,  and  shall  j^erform  such  duties 
in  accordance  with  the  instructions  received  from  and  rules 
and  regulations  made  by  the  comptroller  and  auditor.  Such 
persons  as  are  residing  in  a  foreign  country  when  first  em- 
jjloyed  hereunder  shall  not  be  required  to  take  an  oath  of 
office  or  be  required  to  be  employed  jDursuant  to  the  laws, 
rules,  and  regulations  relating  to  the  classified  civil  service, 
nor  shall  they  be  reimbursed  for  subsistence  expenses  at  their 
post  of  duty  or  for  expenses  in  traveling  to  or  from  the 
United  States. 

(e)  That  it  shall  be  the  duty  of  all  contracting,  ]iurchasing, 
and  disbursing  officers  to  allow  any  representative  of  the 
comptroller  or  auditor  to  examine  all  books,  records,  and 
papers  in  any  way  connected  with  the  receipt,  disbursement, 
or  disposal  of  public  money,  and  to  render  such  accounts  and 
at  such  times  as  may  be  required  by  the  comi^troller.  No 
administrative  examination  by  the  War  Department  shall  be 
required  of  accounts  rendered  and  settled  abroad,  and  the 
time  within  which  these  accounts  shall  be  rendered  b}^  disburs- 
ing officers  shall  be  prescribed  by  the  comptroller,  who  shall 
have  power  to  waive  any  delinquency  as  to  time  or  fonn 
in  the  rendition  of  these  accounts.  All  contracts  connected 
with  accounts  to  be  settled  by  the  auditor  abroad  shall  be  filed 
in  his  office  there. 

(f)  That  any  person  appointed  or  employed  under  the 
provisions  of  this  section  who  at  the  time  is  in  the  service  of 
the  United  States  shall,  upon  termination  of  his  services  here- 
under, be  restored  to  the  position  held  by  him  at*  the  time  of 
such  employment.  No  jDrovision  of  existing  law  shall  be 
construed  to  prevent  the  payment  of  money  appropriated  for 
the  salary  of  any  Government  officer  or  employee  at  the  seat 
of  Government  Avho  may  de  detailed  to  perform  duty  under 
this  section  outside  the  District  of  Columbia,  and  such  details 
are  hereby  authorized. 

(g)  That  for  the  payment  of  the  expenses  in  carrying  into 
effect  this  section,  including  traveling  expenses,  per  diem  of 
$4  in  lieu  of  subsistence  for  officers  and  employees  absent 

452 


LIBERTY  BOND  ACTS 

from  Washington,  rent,  cablegrams  and  telegrams,  printing, 
law  books,  books  of  reference,  periodicals,  stationery,  office 
equipment  and  exchange  thereof,  supplies,  and  all  other 
necessary  expenses,  there  is  hereby  appropriated,  out  of  any 
money  in  the  Treasury  not  otherwise  apjiropriated,  for  the 
fiscal  year  ending  June  thirtieth,  nineteen  hundred  and 
eighteen,  the  sum  of  $300,000,  of  which  not  exceeding  $25,000 
may  be  expended  at  Washington  for  the  purposes  of 
this  section,  but  no  oflScer  or  employee  shall  receive  for 
duty  in  Washington  any  comi:)ensation  other  than  his  regular 
salary. 

(h)  That  the  Secretary  of  the  Treasury  may  designate  not 
more  than  two  persons  employed  hereunder  to  act  as  special 
disbursing  agents  of  the  approi)riation  herein,  to  serve  under 
the  direction  of  the  comptroller,  and  their  accounts  shall  be 
rendered  to  and  settled  by  the  accounting  officers  of  the 
Treasury  in  Washington.  All  persons  employed  under  this 
section  shall  perfonn  such  additional  duties  as  the  Secretary 
of  the  Treasury  may  direct. 

(i)  That  the  eomijtrollcr  and  the  auditor,  and  such  persons 
as  may  be  authorized  in  writing  by  either  of  them,  may 
administer  oaths  to  American  citizens  in  resi^ect  to  any  matter 
within  the  jurisdiction  of  either  of  said  officers  and  certify 
the  official  character,  when  known,  of  any  foreign  officer 
whose  jurat  or  certificate  may  be  necessary  on  any  paper  to 
be  filed  with  them. 

(j)  That  persons  engaged  in  work  abroad  under  the  pro- 
visions of  this  section  may  purchase  from  Army  stores  for 
cash  and  at  cost  price  for  their  own  use  such  articles  or 
stores  as  may  be  sold  to  officers  and  enlisted  men. 

(k)  That  the  authority  granted  under  this  section  shall 
terminate  six  months  after  the  close  of  the  war  or  at  such 
earlier  date  as  the  Secretary  of  the  Treasury  may  direct,  and 
it  shall  be  the  duty  of  the  comi')troller  and  auditor  to  make 
such  reports  as  the  Secretary  of  the  Treasury  may  require  of 
the  expenditures  made  and  work  done  i^ursuant  to  this  section, 
and  such  reports  shall  be  transmitted  to  the  Congress  at  such 
time  as  he  may  decide  to  be  compatible  with  the  public 
interest. 

(1)  No  officers,  employees,  or  agents  appointed  or  employed 
under  this  section  shall  receive  more  salarv  or  compensation 

453 


WAR  COSTS  AND  THEIR  FINANCING 

than  like  officers,  employees,  or  agents  of  the  Government  now 
receive. 

Sec.  13.  That  for  the  purposes  of  this  Act  the  date  of  the 
termination  of  the  war  between  the  United  States  and  the 
Imi^erial  German  Government  shall  be  fixed  by  proclamation 
of  the  President  of  the  United  States. 

Approved,  September  24,  1917. 

Supplement  to  Second  Liberty  Bond  Act 

An  Act  To  supplement  the  Second  Liberty  Bond  Act,  as  amended, 
and  for  other  purposes. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives 
of  the  United  States  of  America  in  Congress  assembled,  That 
until  the  expiration  of  two  years  after  the  date  of  the  ter- 
mination of  the  war  between  the  United  States  and  the 
Imperial  German  Government,  as  fixed  by  proclamation  of  the 
President  — 

(1)  The  interest  on  an  amount  of  bonds  of  the  Fourth 
Liberty  Loan  the  princij^al  of  which  does  not  exceed  $30,000, 
OAvned  by  any  individual,  partnership,  association,  or  corpora- 
tion, shall  be  exempt  from  graduated  additional  income  taxes, 
commonly  known  as  surtaxes,  and  excess  profits  and  war- 
profits  taxes,  now  or  hereafter  imposed  by  the  United  States, 
upon  the  income  or  profits  of  individuals,  partnerships, 
associations,  or  corporations; 

(2)  The  interest  received  after  January  1,  1918,  on  an 
amount  of  bonds  of  the  First  Liberty  Loan  Converted,  dated 
either  November  15,  1917,  or  May  9,  1918,  the  Second  Liberty 
Loan,  converted  and  unconverted,  and  the  Third  Liberty  Loan, 
the  prineiiDal  of  which  does  not  exceed  $45,000  in  the  aggre- 
gate, owned  by  any  individual,  partnership,  association,  or 
corporation,  shall  be  exempt  from  such  taxes :  Provided,  how- 
ever, That  no  owner  of  such  bonds  shall  be  entitled  to  such 
exemption  in  respect  to  the  interest  on  an  aggregate  principal 
amount  of  such  bonds  exceeding  one  and  one-half  times  the 
principal  amount  of  bonds  of  the  Fourth  Liberty  Loan  origi- 
nally subscribed  for  by  such  owner  and  still  owned  by  him  at 
the  date  of  his  tax  return;  and 

(3)  The  interest  on  amount  of  bonds,  the  principal  of 
which   does   not   exceed   $30,000,    owned   by   any   individual, 

454 


* 


LIBERTY  BOND  ACTS 

partnership,  association,  or  corporation,  issued  ui)on  conver- 
sion of  31/2  per  centum  bonds  of  the  First  Liberty  Loan  in 
the  exercise  of  any  privilege  arising  as  a  consequence  of  the 
issue  of  bonds  of  the  Fourth  Libert}'  Loan,  shall  be  exempt 
from  such  taxes. 

The  exemptions  provided  in  this  section  shall  be  in  addition 
to  the  exemption  jjrovided  in  section  7  of  the  Second  Liberty 
Bond  Act  in  respect  to  the  interest  on  an  amount  of  bonds 
and  certificates,  authorized  by  such  Act  and  amendments 
thereto,  the  principal  of  which  does  not  exceed  in  the  aggre- 
gate $5,000,  and  in  addition  to  all  other  exemptions  jDrovided 
in  the  Second  Liberty  Bond  Act. 

Sec.  2.  That  section  6  of  the  Second  Liberty  Bond  Act  is 
hereby  amended  by  striking  out  the  figures  "  $2,000,000,000," 
and  inserting  in  lieu  thereof  the  figures  "  $4,000,000,000." 
Such  section  is  further  amended  by  striking  out  the  words 
''  The  amount  of  war  savings  certificates  sold  to  any  one  person 
at  any  one  time  shall  not  exceed  $100,  and  it  shall  not  be 
lawful  for  any  one  person  at  any  one  time  to  hold  war 
savings  certificates  to  an  aggregate  amount  exceeding  $1,000," 
and  inserting  in  lieu  thereof  the  words  "  It  shall  not  be  laAvful 
for  any  one  person  at  any  one  time  to  hold  war  savings 
certificates  of  any  one  scries  to  an  aggregate  amount  exceed- 
ing $1,000." 

Sec.  3.  That  the  j^rovisions  of  section  8  of  the  Second 
Liberty  Bond  Act,  as  amended  by  the  Third  Liberty  Bond 
Act,  shall  apply  to  the  proceeds  arising  from  the  i)ayment 
of  war-profits  taxes  as  well  as  income  and  excess  profits  taxes. 

Sec.  4.  That  the  Secretary  of  the  Trciisurj'  msi}'?  during 
the  war  and  for  two  years  after  its  termination,  make  arrange- 
ments in  or  with  foreign  countries  to  stabilize  the  foreign 
exchanges  and  to  obtain  foreign  currencies  and  credits  in  such 
currencies,  and  he  may  use  any  such  credits  and  foreign  cur- 
rencies for  the  purpose  of  stabilizing  or  rectifying  the  foreign 
exchanges,  and  he  may  designate  dejiositaries  in  foreign 
countries  Avith  Avhich  may  be  deposited  as  he  may  determine 
all  or  any  part  of  the  avails  of  any  foreign  credits  or  foreign 
currencies. 

Sec.  5.  That  subdivision,  (b)  of  section  5  of  the  Trading 
with  the  Enemy  Act  be.  and  hereby  is,  amended  to  road  as 
follows : 

455 


WAR  COSTS  AND  THEIR  FINANCING 

"(b)  That  the  President  may  investigate,  regulate,  or  pro- 
hibit, under  such  rules  and  regulations  as  he  may  prescribe, 
by  means  of  licenses  or  otherwise,  any  transactions  in  foreign 
exchange  and  the  export,  hoarding,  melting,  or  earmarkings 
of  gold  or  silver  coin  or  bullion  or  currency,  transfers  of  credit 
in  any  form  (other  than  credits  relating  solely  to  transactions 
to  be  executed  Avholly  within  the  United  States),  and  transfers 
of  evidences  of  indebtedness  or  of  the  ownership  of  property 
between  the  United  States  and  any  foreign  country,  whether 
enemy,  ally  of  enemy,  or  otherwise,  or  between  residents  of 
one  or  more  foreign  countries,  by  any  jjerson  within  the  United 
States  and,  for  the  purpose  of  strengthening,  sustaining  and 
broadening  the  market  for  bonds  and  certificates  of  indebted- 
ness of  the  United  States,  of  preventing  frauds  upon  the 
holders  thereof,  and  of  protecting  such  holders,  he  may  in- 
vestigate and  regulate,  by  means  of  licenses  or  otherwise 
(until  the  expiration  of  two  years  after  the  date  of  the 
termination  of  the  present  war  with  the  Imperial  German 
Government,  as  fixed  by  his  proclamation),  any  transactions 
in  such  bonds  or  certificates  by  or  between  any  person  or 
persons :  Provided,  That  nothing  contained  in  this  subdivision 
(b)  shall  be  construed  to  confer  any  power  to  prohibit  the 
IDurchase  or  sale  for  cash,  or  for  notes  eligible  for  discount 
at  any  Federal  Reserve  Bank,  of  bonds  or  certificates  of 
indebtedness  of  the  United  States;  and  he  may  require  any 
person  engaged  in  any  transaction  referred  to  in  this  sub 
division  to  furnish,  under  oath,  complete  information  relativtj 
thereto,  including  the  production  of  any  books  of  account, 
contracts,  letters  or  other  j^apers,  in  connection  therewith  in 
the  custody  or  control  of  such  person,  either  before  or  after 
such  transaction  is  completed." 

Sec.  6.  That  section  5200  of  the  Revised  Statutes,  as 
amended,  be,  and  herebj^  is,  amended  to  read  as  follows: 

''  Sec.  5200.  The  total  liabilities  to  any  association,  of  any 
person,  or  of  any  company,  corporation,  or  firm  for  money 
borrowed,  including  in  the  liabilities  of  a  company  or  firm 
the  liabilities  of  the  several  members  thereof,  shall  at  no  time 
exceed  10  per  centum  of  the  amount  of  the  capital  stock  of 
svich  association,  actually  paid  in  and  unimpaired,  and  10  per 
centum  of  its  unimpaired  surplus  fund :  Provided,  lioicevcr, 
That  (1)  the  discount  of  bills  of  exchange  drawn  in  good  faith 

456 


LIBERTY  BOND  ACTS 

against  actually  existing  values,  (2)  the  discount  of  com- 
mercial or  business  pa^^er  actually  owned  by  the  person,  com- 
pany, corporation,  or  firm,  negotiating  the  same,  and  (3)  the 
purchase  or  discount  of  any  note  or  notes  secured  by  not  less 
than  a  like  face  amount  of  bonds  of  the  United  States  issued 
since  April  24,  1917,  or  certificates  of  indebtedness  of  the 
United  States,  shall  not  be  considered  as  money  borrowed 
within  the  meaning  of  this  section;  bu.t  the  total  liabilities  to 
any  association,  of  any  person  or  of  any  company',  corpo- 
ration, or  firm,  upon  any  note  or  notes  purchased  or  dis- 
counted by  such  association  and  secured  by  such  bonds  or 
certificates  of  indebtedness,  shall  not  exceed  (except  to  the 
extent  permitted  by  rules  and  regulations  prescribed  by  the 
Comptroller  of  the  Currency,  with  the  approval  of  the  Secre- 
tary of  the  Treasury')  10  per  centum  of  such  capital  stock 
and  surplus  fund  of  svich  association." 

Sec.  7.  That  the  short  title  of  this  Act  shall  be  "  Supple- 
ment to  Second  Liberty  Bond  Act." 

Approved,  September  24,  1918. 

Third  Liberty  Bond  Act 

An  Act  To  amend  an  Act  approved  September  twenty-fourth, 
nineteen  hundred  and  seventeen,  entitled  "  An  Act  to  author- 
ize an  additional  issue  of  bonds  to  meet  expenditures  for  the 
national  security  and  defense,  and,  for  the  purpose  of  assist- 
ing in  the  prosecution  of  the  war,  to  extend  additional 
credit  to  foreign  governments,  and  for  other  purposes." 

Be  it  enacted  hy  the  Senate  and  House  of  Bepresentatives 
of  the  United  States  of  America  in  Congress  assembled,  That 
the  first  section  of  the  Act  approved  Sei)tcmber  twenty'- fourth, 
nineteen  hundred  and  seventeen,  entitled  "  An  Act  to  author- 
ize an  additional  issue  of  bonds  to  meet  expenditures  for  the 
national  security  and  defense,  and,  for  the  purpose  of  assisting 
in  the  i:)rosecution  of  the  war,  to  extend  additional  credit  to 
foreign  governments,  and  for  other  purposes,"  be,  and  is 
hereby,  amended  to  read  as  follows : 

"  That  the  Secretaiy  of  the  Treasury,  Avith  the  approval  of 
the  President,  is  hereby  authorized  to  liorrow  from  time  to 
time,  on  the  credit  of  the  United  States  for  the  purposes  of 
this  Act,  and  to  meet  expenditures  authoi'ized  for  the  national 

457 


WAR  COSTS  AND  THEIR  FINANCING 

security  and  defense  and  other  public  purposes  authorized  by 
law,  not  exceeding  in  the  aggregate  $12,000,000,000,  and  to 
issue  therefor  bonds  of  the  United  States,  in  addition  to  the 
$2,000,000,000  bonds  already  issued  or  offered  for  subscription 
under  authority  of  the  Act  approved  Ajoril  twenty-fourth, 
nineteen  hundred  and  seventeen,  entitled  '  An  Act  to  authorize 
an  issue  of  bonds  to  meet  expenditures  for  the  national 
security  and  defense,  and,  for  the  purjrtose  of  assisting  in  the 
prosecution  of  the  Avar,  to  extend  credit  to  foreign  govern- 
ments, and  for  other  purposes  ' :  Provided,  That  of  this  sum 
$3,003,945,400  shall  be  in  lieu  of  that  amount  of  the  unissued 
bonds  authorized  by  sections  one  and  four  of  the  Act  aj^proved 
April  twenty-fourth,  nineteen  hundred  and  seventeen,  $225,- 
000,000  shall  be  in  lieu  of  that  amount  of  the  unissued  bonds 
authorized  by  section  thirty-nine  of  the  A.ct  approved  August 
fifth,  nineteen  hundred  and  nine,  $150,000,000  shall  be  in  lieu 
of  the  unissued  bonds  authorized  by  the  joint  resolution 
approved  March  fourth,  nineteen  hundred  and  seventeen,  and 
$100,000,000  shall  be  in  lieu  of  the  unissued  bonds  authorized 
by  section  four  hundred  of  the  Act  ajoproved  March  third, 
nineteen  hundred  and  seventeen. 

"  The  bonds  herein  authorized  shall  be  in  such  fonn  or 
forms  and  denomination  or  denominations  and  subject  to  such 
terms  and  conditions  of  issue,  conversion,  redemption, 
maturities,  payment,  and  rate  or  rates  of  interest,  not  exceed- 
ing four  and  one-quarter  per  centum  per  annum,  and  time  or 
times  of  paj^ment  of  interest,  as  the  Secretary  of  the  Treasuiy 
from  time  to  time  at  or  before  the  issue  thereof  may  prescribe. 
The  principal  and  interest  thereof  shall  be  payable  in  United 
States  gold  coin  of  the  present  standard  of  value. 

"  The  bonds  herein  authorized  shall  from  time  to  time  first 
be  offered  at  not  less  than  par  as  a  popular  loan,  under  such 
regulations,  prescribed  by  the  Secretary  of  the  Treasury  from 
time  to  time,  as  will  in  his  opinion  give  the  people  of  the 
United  States  as  nearly  as  may  be  an  equal  opportunity  to 
participate  therein,  but  he  may  make  allotment  in  full  upon 
applications  for  smaller  amounts  of  bonds  in  advance  of 
any  date  Avhich  he  may  set  for  the  closing  of  subscriptions  and 
may  reject  or  reduce  allotments  upon  later  applications  and 
applications  for  larger  amounts,  and  may  reject  or  reduce 
allotments  upon  ajiplications  from  incorporated  banks  and 

458 


LIBERTY  BOND  ACTS 

trust  companies  for  tlioir  own  account  and  make  allotment  in 
full  or  larger  allotments  to  others,  and  may  establish  a 
graduated  scale  of  allotments,  and  may  from  time  to  time 
adopt  an}^  or  all  of  said  methods,  should  any  such  action  be 
deemed  by  him  to  be  in  the  public  interest :  Provided,  That 
such  reduction  or  increase  of  allotments  of  such  bonds  shall 
be  made  under  general  rules  to  be  prescribed  by  said  Secretary 
and  shall  apply  to  all  subscribers  similarly  situated.  And 
any  portion  of  the  bonds  so  offered  and  not  taken  may  be 
otherwise  disposed  of  by  the  Secretary  of  the  Treasury  in 
such  manner  and  at  such  price  or  prices,  not  less  than  par, 
as  he  may  determine.  The  Secretary  may  make  special 
arrangements  for  subscriptions  at  not  less  than  i^ar  from 
persons  in  the  military  or  naval  forces  of  the  United  States, 
but  any  bonds  issued  to  such  persons  shall  be  in  all  respects 
the  same  as  other  bonds  of  the  same  issue." 

Sec.  2.  That  the  last  sentence  of  section  two  of  said  Act 
approved  September  twenty-fourth,  nineteen  hundred  and 
seventeen,  be,   and   is  hereby,   amended  to  read  as   follows : 

"  For  the  purposes  of  this  section  there  is  appropriated, 
out  of  any  money  in  the  Treasury  not  otherwise  appropriated, 
the  sum  of  $5,500,000,000,  and  in  addition  thereto  the  unex- 
pended balance  of  the  appropriations  made  by  section  two 
of  said  act  approved  April  twenty-fourth,  nineteen  hundred 
and  seventeen,  or  so  much  thereof  as  may  be  necessary: 
Provided,  That  the  authority  granted  by  this  section  to  the 
Secretary  of  the  Treasury  to  establish  credits  for  foreign 
Governments,  as  aforesaid,  shall  cease  ujion  the  termination 
of  the  war  between  the  United  States  and  the  Imperial 
German  Government." 

Sec.  3.  That  section  four  of  said  Act  approved  September 
twenty-fourth,  nineteen  hundred  and  seventeen,  is  hereby 
amended  by  adding  two  new  paragraphs,  as  follows: 

"  That  holders  of  bonds  bearing  interest  at  a  higher  rate 
than  four  per  centum  per  annum,  whether  issued  (a)  under 
section  one,  or  (b)  upon  conversion  of  four  per  centum  bonds 
issued  under  section  one,  or  (c)  upon  conversion  of  three  and 
one-half  per  centum  bonds  issued  under  said  Act  ai^proved 
April  twcntj'-fourth,  nineteen  hundred  and  seventeen,  or  (d) 
upon  conversion  of  four  per  centum  bonds  issued  upon  con- 
version of  such  three  and  one-half  per  centum  bonds,  shall 

459 


WAR  COSTS  AND  THEIR  FINANCING 

not  be  entitled  to  any  privilege  of  conversion  under  or  pursu- 
ant to  this  section  or  otherwise.  The  provisions  of  section 
seven  shall  extend  to  all  such  bonds. 

''  If  bonds  bearing  interest  at  a  higher  rate  than  four 
per  centum  per  annum  shall  be  issued  before  July  first, 
nineteen  hundred  and  eighteen,  then  any  bonds  bearing 
interest  at  the  rate  of  four  per  centum  per  annum  which 
shall,  after  July  first,  nineteen  hundred  and  eighteen,  and 
before  the  expiration  of  the  six  months'  conversion  period 
prescribed  by  the  Secretary  of  the  Treasury,  be  presented  for 
conversion  into  bonds  bearing  interest  at  such  higher  rate, 
shall,  for  the  purpose  of  computing  the  amount  of  interest 
payable,  be  deemed  to  have  been  converted  on  the  dates  for 
the  payment  of  the  semiannual  interest  on  the  respective  bonds 
so  presented  for  conversion,  last  preceding  the  date  of  such 
liresentation." 

Sec.  4.  That  the  last  sentence  of  section  five  of  said  Act 
approved  September  twenty-fourth,  nineteen  hundred  and 
seventeen,  be,  and  is  hereby,  amended  to  read  as  follows : 

"  The  sum  of  such  certificates  ov^tstanding  hereunder  and 
under  section  six  of  said  Act  approved  April  twenty-fourth, 
nineteen  hundred  and  seventeen,  shall  not  at  any  one  time 
exceed  in  the  aggregate  $8,000,000,000." 

Sec.  5.  That  section  eight  of  said  Act  approved  Septem- 
ber twenty-fourth,  nineteen  hundred  and  seventeen,  be,  and  is 
hereb}^,  amended  to  read  as  follows : 

''  Sec.  8.  That  the  Secretary  of  the  Treasuiy,  in  his  dis- 
cretion, is  hereby  authorized  to  dej^osit,  in  such  incorporated 
banks  and  trust  comj^anies  as  he  may  designate,  the  proceeds, 
or  any  part  thereof,  arising  from  the  sale  of  the  bonds  and 
certificates  of  indebtedness  and  war-savings  certificates  author- 
ized by  this  Act,  and  arising  from  the  pajmient  of  income 
and  excess  profits  taxes,  and  such  deposits  shall  bear  such 
rate  or  rates  of  interest,  and  shall  be  secured  in  such  manner, 
and  shall  be  made  upon  and  subject  to  such  terms  and  condi- 
t'ons  as  the  Secretaiy  of  the  Treasurj^  may  from  time  to 
time  i^rescribe:  Provided,  That  the  provisions  of  section  fifty- 
one  hundred  and  ninet3^-one  of  the  Revised  Statutes,  as 
amended  by  the  Federal  R-serve  Act,  and  the  amendments 
thereof,  with  reference  to  the  reserves  required  to  be  kept  by 
national  banking  associations  and  other  member  banks  of  the 

460 


LIBERTY  BOND  ACTS 

Federal  Reserve  System,  shall  not  apply  to  deposits  of  public 
moneys  by  the  United  States  in  designated  depositaries.  The 
Secretary  of  the  Treasury  is  hereby  authorized  to  designate 
depositaries  in  foreign  countries  with  which  shall  be  deposited 
all  public  money  which  it  maj^  be  necessary  or  desirable  to 
have  on  dejDosit  in  such  countries  to  provide  for  current 
disbursements  to  the  military  and  naval  forces  of  the  United 
States  and  to  the  diplomatic  and  consular  and  other  repre- 
sentatives of  the  United  States  in  and  about  such  countries 
until  six  months  after  the  termination  of  the  war  between  the 
United  States  and  the  Imperial  German  Government,  and  to 
prescribe  the  terms  and  conditions  of  such  deposits." 

Sec.  6.  That  said  Act  a^^proved  Scj^tember  twenty-fourth, 
nineteen  hundred  and  seventeen,  is  hereby  amended  by  adding 
four  new  sections,  to  read  as  follows : 

"  Sec.  14.  That  any  bonds  of  the  United  States  bearing 
interest  at  a  higher  rate  than  four  per  centum  per  annum 
(whether  issued  under  section  one  of  this  Act  or  upon  conver- 
sion of  bonds  issued  under  this  Act  or  under  said  Act  approved 
April  twenty-fourth,  nineteen  hundi'cd  and  seventeen),  which 
have  been  owned  by  any  person  continuously  for  at  least 
six  months  prior  to  the  date  of  his  death,  and  which  upon 
such  date  constitute  part  of  his  estate,  shall,  under  rules  and 
regulations  prescribed  by  the  Secretary  of  the  Treasury,  be 
receivable  by  the  United  States  at  par  and  accrued  interest  in 
payment  of  any  estate  or  inheritance  taxes  imposed  by  the 
United  States,  under  or  by  virtue  of  any  present  or  future  law 
upon  such  estate  or  the  inheritance  thereof. 

"  Sec.  15.  That  the  Secretary  of  the  Treasury  is  author- 
ized, from  time  to  time,  until  the  expiration  of  one  year  after 
the  termination  of  the  war,  to  purchase  bonds  issued  under 
authority  of  this  Act,  including  bonds  issued  upon  conversion 
of  bonds  issued  under  this  Act  or  said  Act  approved  April 
twenty-fourth,  nineteen  hundred  and  seventeen,  at  such  prices 
and  upon  such  terms  and  conditions  as  he  may  prescribe  The 
par  amount  of  bonds  of  any  such  series  which  may  be  pur- 
chased in  the  tAvelve  months'  period  beginning  on  the  date 
of  issvie  shall  not  exceed  one-twentieth  of  the  par  amount  of 
bonds  of  such  series  originally  issued,  and  in  each  twelve 
months'  period  thereafter  shall  not  exceed  one-twentieth  of 
the  amount  of  the  bonds  of  such  series  outstanding  at  the 

461 


WAR  COSTS  AND  THEIR  FINANCING 

beginning  of  such  twelve  months'  period.  The  average  cost 
of  the  bonds  of  any  series  purchased  in  any  such  twelve 
months'  period  shall  not  exceed  par  and  accrued  interest. 

"  For  the  purjjoses  of  this  section  the  Secretary  of  the 
Treasury'  shall  set  aside,  out  of  any  money  in  the  Treasury 
not  otherwise  ai^propriated,  a  sum  not  exceeding  one-twentieth 
of  the  amount  of  such  bonds  issued  before  April  first,  nineteen 
hundred  and  eighteen,  and  as  and  when  any  more  such  bonds 
are  issued  he  shall  set  aside  a  sum  not  exceeding  one-twentieth 
thereof.  Whenever,  by  reason  of  purchases  of  bonds,  as  pro- 
vided in  this  section,  the  amount  so  set  aside  falls  below  the 
sum  which  he  deems  necessary  for  the  purposes  of  this  section, 
the  Secretary  of  the  Treasury  shall  set  aside  such  amount  as 
he  shall  deem  necessary,  but  not  more  than  enough  to  bring 
the  entire  amount  so  set  aside  at  such  time  up  to  one-twentieth 
of  the  amount  of  such  bonds  then  outstanding.  The  amount 
so  set  aside  by  the  Secretary  of  the  Treasury  is  hereby 
appropriated  for  the  purjDOses  of  this  section,  to  be  available 
until  the  expiration  of  one  year  after  the  termination  of  the 
war. 

"  The  Secretary  of  the  Treasury  shall  make  to  Congress  at 
the  beginning  of  each  regular  session  a  report  including  a. 
detailed  statement  of  the  operations  under  this  section. 

"  Sec.  16.  That  any  of  the  bonds  or  certificates  of  in- 
debtedness authorized  by  this  Act  may  be  issued  by  the 
Secretary  of  the  Treasury  payable,  principal  and  interest,  in 
any  foreign  money  or  foreign  moneys,  as  expressed  in  such 
bonds'  or  certificates,  but  not  also  in  United  States  gold  coin, 
and  he  may  dispose  of  such  bonds  or  certificates  in  such 
manner  and  at  such  prices,  not  less  than  par,  as  he  may  deter- 
mine, without  compliance  with  the  provisions  of  the  third 
paragraph  of  section  one.  In  determining  the  amount  of 
bonds  and  certificates  issviable  under  this  Act  the  dollar 
equivalent  of  this  amount  of  any  bonds  or  certificates  payable 
in  foreign  money  or  foreign  moneys  shall  be  determined  by 
the  par  of  exchange  at  the  date  of  issue  thereof,  as  estimated 
by  the  Director  of  the  Mint,  and  proclaimed  by  the  Secretary 
of  the  Treasury,  in  pursuance  of  the  provisions  of  section 
twenty-five  of  the  Act  approved  August  twenty-seventh, 
eighteen  hundred  and  ninety-four,  entitled  '  An  Act  to  reduce 
taxation,  to  provide  revenue  for  the  Government,  and  for 

462 


LIBERTY  BOND  ACTS 

other  jDurposes/  The  Secretary  of  the  Treasury  may  desig- 
nate dei?ositaries  in  foreign  countries,  "witli  which  may  be 
deposited  as  he  may  determine  all  or  any  part  of  the  proceeds 
of  any  bonds  or  certificates  authorized  by  this  Act,  payable 
in  foreign  money  or  foreign  moneys. 

"  Sec.  17.  Tliat  the  short  title  of  this  Act  shall  be 
*  Second  Liberty  Bond  Act.'  " 

Sec.  7.  That  the  Act  entitled  "  An  Act  to  authorize  an 
issue  of  bonds  to  meet  expenditures  for  the  national  security 
and  defense,  and,  for  the  purjwse  of  assisting  in  the  prosecu- 
tion of  the  war,  to  extend  credit  to  foreign  governments,  and 
for  other  purposes,"  aiiproved  April  tAventy- fourth,  nineteen 
hundred  and  seventeen,  is  hereby  amended  by  adding  a  new 
section  to  read  as  follows: 

"  Sec.  9.  That  the  short  title  of  this  Act  shall  be  '  First 
Liberty  Bond  Act.'  " 

Sec.  8.  That  the  short  title  of  this  Act  shall  be  "  Third 
Liberty  Bond  Act." 

Approved,  April  4,  1918. 

Fourth  Liberty  Bond  Act 

An  Act  To  authorize  an  additional  issue  of  bonds  to  meet 
expenditures  for  the  national  security  and  defense,  and,  for 
the  purpose  of  assisting  in  the  prosecution  of  the  war,  to 
extend  additional  credit  to  foreign  Governments,  and  for 
other  purposes. 

Be  it  enacted  hi/  the  Senate  and  House  of  Itepresentativcs 
of  the  United  States  of  America  in  Congress  assembled,  That 
section  one  of  the  Second  Liberty  Bond  Act,  as  amended  by 
the  Third  Liberty  Bond  Act,  is  hereby  further  amendod  by 
striking  out  the  ^figures  "  $12,000,000,000  "  and  inserting  in 
lieu  thereof  the  figures  "  $20,000,000,000." 

Sec.  2.  That  section  tAvo  of  the  Second  Liberty  Bond  Act, 
as  amended  by  the  Third  Liberty  Bond  Act,  is  hereby  further 
amended  by  striking  out  the  figures  "  $5,500,000,000  "  and 
inserting  in  lieu  thereof  the  figures  "  $7,000,000,000." 

Sec.  3.  That  notwithstanding  the  provisions  of  the  Second 
Liberty  Bond  Act,  as  amended  by  the  Third  Liberty  Bond  Act, 
or  of  the  War  Finance  Corporation  Act,  bonds  and  certificates 

463 


WAR  COSTS  AND  THEIR  FINANCING 

of  indebtedness  of  the  United  States  payable  in  any  foreign 
money  or  foreign  moneys,  and  bonds  of  the  War  Finance 
CoriDoration  i3ayable  in  any  foreign  money  or  foreign  moneys 
exchisively  or  in  tlie  alternative,  shall,  if  and  to  the  extent 
expressed  in  such  bonds  at  the  time  of  their  issue,  with  the 
ajDproval  of  the  Secretary  of  the  Treasury,  while  beneficially 
owned  by  a  nonresident  alien  individual,  or  by  a  foreign 
corporation,  partnership,  or  association,  not  engaged  in  busi- 
ness in  the  United  States,  be  exempt  both  as  to  principal  and 
interest  from  any  and  all  taxation  now  or  hereafter  imposed 
by  the  United  States,  any  State,  or  any  of  the  possessions  of 
the  United  States,  or  by  any  local  taxing  authority. 

Sec.  4.  That  any  incorporated  bank  or  trust  company 
designated  as  a  depositary  by  the  Secretary  of  the  Treasury 
under  the  authority  conferred  by  section  eight  of  the  Second 
Liberty  Bond  Act,  as  amended  by  the  Third  Liberty  Bond 
Act,  which  gives  security  for  such  deposits  as,  and  to  amounts, 
by  him  prescribed,  may,  upon  and  subject  to  such  terms 
and  conditions  as  the  Secretary  of  the  Treasury  may  prescribe, 
act  as  a  fiscal  agent  of  the  United  States  in  connection  with 
the  operations  of  selling  and  delivering  any  bonds,  certificates 
of  indebtedness  or  war  savings  certificates  of  the  United  States. 

Sec.  5.  That  the  short  title  of  this  Act  shall  be  "  Fourth 
Liberty  Bond  Act." 

Approved,  July  9,  1918. 

Victory  Liberty  Loan  Act 

An  Act  To  amend  the  Liberty  Bond  Acts  and  the  War  Finance 
Corporation  Act,  and  for  other  purposes. 

Be  it  enacted  by  the  Senate  mid  House  of  Representatives 
of  the  United  States  of  America  in  Congress  assembled^  That 
the  Second  Liberty  Bond  Act  is  hereby  amended  by  adding 
thereto  a  new  section  to  read  as  follows : 

"  Sec.  18.  (a)  That  in  addition  to  the  bonds  and  certifi- 
cates of  indebtedness  and  war-savings  certificates  authorized 
by  this  Act  and  amendments  thereto,  the  Secretary  of  the 
Treasury,  with  the  approval  of  the  President,  is  authorized  to 
borrow  from  time  to  time  on  the  credit  of  the  United  States 
for  the  purposes  of  this  Act,  and  to  meet  public  expenditures 

464 


LIBERTY  BOND  ACTS 

authorized  by  law,  not  exceeding  in  the  aggregate  $7,000,000,- 
000,  and  to  issue  therefor  notes  of  the  United  States  at  not 
less  than  par  in  such  form  or  forms  and  denomination  or 
denominations,  containing  such  terms  and  conditions,  and 
at  such  rate  or  rates  of  interest,  as  the  Secretarj'^  of  the 
Treasury  may  prescribe,  and  each  series  of  notes  so  issued 
shall  be  jDayable  at  such  time  not  less  than  one  j'ear  nor  more 
than  five  j'ears  from  the  date  of  its  issue  as  he  may  prescribe, 
and  ma}^  be  redeemable  before  maturity  (at  the  option  of  the 
United  States)  in  whole  or  in  part,  upon  not  more  than  one 
year's  nor  less  than  four  month's  notice,  and  under  such  rules 
and  regulations  and  during  such  period  as  he  may  prescribe. 

''(b)  The  notes  herein  authorized  may  be  issued  in  any 
one  or  more  of  the  following  series  as  the  Secretary  of  the 
Treasury  may  prescribe  in  connection  with  the  issue  thereof: 

"(1)  Exempt,  both  as  to  principal  and  interest,  from  all 
taxation  (except  estate  or  inheritance  taxes)  now  or  hereafter 
imposed  by  the  United  States,  an}^  State,  or  any  of  the 
possessions  of  the  United  States,  or  by  anj'  local  taxing 
authoritj' ; 

"(2)  ExemjDt,  both  as  to  princij^al  and  interest,  from  all 
taxation  noAV  or  hereafter  imposed  by  the  United  States,  any 
State,  or  any  of  the  possessions  of  the  United  States,  or  by 
any  local  taxing  authoritj',  except  (a)  estate  or  inheritance 
taxes,  and  (b)  graduated  additional  income  taxes,  commonly 
kno'vvTi  as  surtaxes,  and  excess  profits  and  war  profits  taxes, 
now  or  hereafter  imjjosed  by  the  United  States,  ujoon  the 
income  or  jirofits  of  individuals,  partnerships,  associations,  or 
corporations ; 

"(3)  Exempt,  both  as  to  principal  and  interest,  as  provided 
in  paragraph  ("2)  ;  and  Avith  an  additional  exemption  from 
the  taxes  referred  to  in  clause  (b)  of  such  paragraph,  of  the 
interest  on  an  amount  of  such  notes  the  jirincipal  of  which 
does  not  exceed  $30,000,  owned  by  any  individual,  iDartnership, 
association,  or  corporation;  or 

"(4)  Exempt,  both  as  to  principal  and  interest,  from  all 
taxation  now  or  hereafter  imposed  by  the  United  States,  any 
State,  or  any  of  the  possessions  of  the  United  States,  or  by 
any  local  taxing  authority,  except  (a)  estate  or  inheritance 
taxes,  and  (b)  all  income,  excess  profits,  and  war  profits  taxes, 
now   or  hereafter  imposed  bv   the  United   States,   upon  the 

465 


WAR  COSTS  AND  THEIR  FINANCING 

income  or  jDrofits  of  individuals,  partnership,  associations,  or 
corjiorations. 

"(c)  If  the  notes  authorized  under  this  section  are  offered 
in  more  than  one  series  bearing  the  same  date  of  issue,  the 
holder  of  notes  of  any  such  series  shall  (under  such  rules 
and  regulations  as  may  be  prescribed  by  the  Secretary  of  the 
Treasury)  have  the  oj^tion  of  having  such  notes  held  by  him 
converted  at  par  into  notes  of  any  other  such  series  offered 
bearing  the  same  date  of  issue. 

"(d)  None  of  the  notes  authorized  by  this  section  shall  bear 
the  circulation  privilege.  The  principal  and  interest  thereof 
shall  be  jjayable  in  United  States  gold  coin  of  the  present 
standard  of  value.  The  word  '  bond  '  or  '  bonds  '  where  it 
ai^pears  in  sections  8,  9,  10,  14,  and  15  of  this  Act  as  amended, 
and  sections  3702,  3703,  3704,  and  3705  of  the  Revised 
Statutes,  and  section  5200  of  the  Revised  Statutes  as  amended, 
but  in  such  sections  only,  shall  be  deemed  to  include  notes 
issued  under  this  section." 

Sec.  2.  (a)  That  until  the  expiration  of  five  years  after 
the  date  of  the  termination  of  the  war  between  the  United 
States  and  the  German  Government,  as  fixed  by  proclamation 
of  the  President,  in  addition  to  the  exemptions  provided  in 
section  7  of  the  Second  Liberty  Bond  Act  in  respect  to  the 
interest  on  an  amount  of  bonds  and  certificates,  authorized 
by  such  Act  and  amendments  thereto,  the  principal  of  which 
does  not  exceed  in  the  agregate  $5,000,  and  in  addition  to 
all  other  exemptions  jjrovided  in  the  Second  Liberty  Bond 
Act  or  the  Supplement  to  Second  Liberty  Bond  Act,  the 
interest  received  on  and  after  January  1,  1919,  on  an  amount 
of  bonds  of  the  First  Liberty  Loan  converted,  dated  November 
15,  1917,  May  9,  1918,  or  October  24,  1918,  the  Second  Liberty 
Loan,  converted  and  unconverted,  the  Third  Liberty  Loan, 
and  the  Fourth  Liberty  Loan,  the  principal  of  which  does  not 
exceed  $30,000  in  the  aggregate,  owned  by  any  individual, 
partnershii),  association,  or  corporation,  shall  be  exempt  from 
graduated  additional  income  taxes,  commonly  known  as  sur- 
taxes, and  excess  profits  and  war  profits  taxes,  now  or  here- 
after imposed  by  the  United  States,  upon  the  income  or  profits 
of  individuals,  partnerships,  associations,  or  corporations. 

(b)   In  addition  to  the  exemption  provided  in  subdivision 
(a),  and  in  addition  to  the  other  exemptions  therein  referred 

466 


LIBERTY  BOND  ACTS 

to,  the  interest  received  on  and  after  January  1,  1919,  on 
any  amount  of  the  bonds  therein  specified  the  principal  of 
which  does  not  exceed  $20,000  in  the  aggi'egate,  owned  by  any 
individual,  partnership,  association,  or  corporation,  shall  be 
exempt  from  the  taxes  therein  specified;  Provided,  That  no 
owner  of  such  bonds  shall  be  entitled  to  such  exemption  in 
respect  to  the  interest  on  an  aggregate  i^rincijial  amount  of 
such  bonds  exceeding  three  times  the  principal  amount  of 
notes  of  the  Victory  Liberty  Loan  originally  subscribed  for  by 
such  owner  and  still  owned  by  him  at  the  date  of  his  tax 
return. 

Sec.  3.  That  section  5  of  the  Second  Liberty  Bond  Act, 
as  amended  by  section  4  of  the  Third  Liberty  Bond  Act, 
is  hereby  further  amended  by  striking  out  the  figures 
"  $8,000,000,000  "  and  inserting  in  lieu  thereof  the  figures 
«  $10,000,000,000." 

Sec.  4.  That  section  3  of  the  Fourth  Liberty  Bond  Act 
is  hereby  amended  to  read  as  follows: 

"  Sec.  3.  That,  notwithstanding  the  provisions  of  the 
Second  Liberty  Bond  Act  or  of  the  War  Finance  Corporation 
Act  or  of  any  other  Act,  bonds,  notes,  and  certificates  of 
indebtedness  of  the  United  States  and  bonds  of  the  War 
Finance  Cori^oration  shall,  while  beneficially  owned  by  a 
nonresident  alien  individual,  or  a  foreign  coriDoration,  part- 
nership, or  association,  not  engaged  in  business  in  the  United 
States,  be  exempt  both  as  to  princiiDal  and  interest  from  any 
and  all  taxation  now  or  hereafter  imposed  by  the  United 
States,  any  State,  or  any  of  the  possessions  of  the  United 
States  or  by  any  local  taxing  authority." 

Sec.  5.  That  the  privilege  of  converting  the  4  per  centum 
bonds  of  the  First  Liberty  Loan  converted  and  4  per  centum 
bonds  of  the  Second  Liberty  Loan  into  4i/i  per  centum  bonds, 
which  privilege  arose  on  May  9,  1918,  and  expired  on  Novem- 
ber 9,  1918,  may  be  extended  by  the  Secretary  of  the  Treasury 
for  such  period,  upon  such  terms  and  conditions  and  subject 
to  such  rules  and  regulations,  as  he  may  prescribe.  For  the 
purpose  of  computing  the  amount  of  interest  paj^able,  bonds 
presented  for  conversion  under  any  such  extension  shall  be 
deemed  to  be  converted  on  the  dates  for  the  payment  of  the 
semiannual  interest  on  the  respective  bonds  so  presented  for 
conversion  next  succeeding  the  date  of  such  presentation. 

467 


WAR  COSTS  AND  THEIR  FINANCING 

Sec.  6.  (a)  That  there  is  hereby  created  in  the  Treasury 
a  cumulative  sinking  fund  for  the  retirement  of  bonds  and 
notes  issued  under  the  First  Liberty  Bond  Act,  the  Second 
Liberty  Bond  Act,  the  Third  Liberty  Bond  Act,  the  Fourth 
Liberty  Bond  Act,  or  under  this  Act,  and  outstanding  on 
July  1,  1920.  The  sinking  fund  and  all  additions  thereto  are 
hereby  appropriated  for  the  payment  of  such  bonds  and  notes 
at  maturity,  or  for  the  redemption  or  purchase  thereof  before 
maturity  by  the  Secretary  of  the  Treasury  at  such  prices  and 
upon  such  terms  and  conditions  as  he  shall  prescribe,  and 
shall  be  available  until  all  such  bonds  and  notes  are  retired. 
The  average  cost  of  the  bonds  and  notes  purchased  shall 
not  exceed  par  and  accrued  interest.  Bonds  and  notes  pur- 
chased, redeemed,  or  paid  out  of  the  sinking  fund  shall  be 
canceled  and  retired  and  shall  not  be  reissued.  For  the  fiscal 
year  beginning  July  1, 1920,  and  for  each  fiscal  year  thereafter 
until  all  such  bonds  and  notes  are  retired  there  is  hereby 
api^roi^riated,  out  of  any  money  in  the  Treasury  not  other- 
wise api^ropriated,  for  the  purposes  of  such  sinking  fund, 
an  amount  equal  to  the  sum  of  (1)  2^2  P^r  centum  of  the 
aggregate  amount  of  such  bonds  and  notes  outstanding  on 
July  1,  1920,  less  an  amount  equal  to  the  par  amount  of  any 
obligations  of  foreign  governments  held  by  the  United  States 
on  July  1,  1920,  and  (2)  the  interest  which  would  have  been 
payable  during  the  fiscal  year  for  Avhich  the  appropriation  is 
made  on  the  bonds  and  notes  purchased,  redeemed,  or  paid 
out  of  the  sinking  fund  during  such  year  or  in  previous  years. 

The  Secretary  of  the  Treasury  shall  submit  to  Congress 
at  the  beginning  of  each  regular  session  a  separate  annual 
report  of  the  action  taken  under  the  authority  contained 
in  the  section. 

(b)  Sections  3688,  3694,  3695,  and  3696  of  the  Revised 
Statutes,  and  so  much  of  section  3689  of  the  Revised 
1  i^er  centum  of  the  entire  debt  of  the  L"'^nited  States  to  be 
set  apart  as  a  sinking  fund,  are  hereby  repealed. 

Sec.  7.  (a)  That  until  the  expiration  of  eighteen  months 
after  the  termination  of  the  war  between  the  United  States 
and  the  German  Government,  as  fixed  by  proclamation  of  the 
President,  the  Secretarj^  of  the  Treasury,  with  the  approval 
of  the  President,  is  hereby  authorized  on  behalf  of  the  United 

468 


LIBERTY  BOND  ACTS 

States  to  establish,  in  addition  to  the  credits  authorized  by 
seotion  2  of  the  Second  Liberty  Bond  Act,  as  amended,  credits 
with  the  United  States  for  any  foreign  Government  now 
engaged  in  Avar  with  the  enemies  of  the  United  States,  for  the 
purpose  only  of  providing  for  purchases  of  any  property 
owned  directly  or  indirectly  by  the  United  States,  not  needed 
by  the  United  States,  or  of  any  wheat  the  price  of  which  has 
been  or  may  be  guaranteed  by  the  United  States.  To  the 
extent  of  the  credits  so  established  from  time  to  time  the 
Secretary  of  the  Treasury  is  hereby  authorized  to  make 
advances  to  or  for  the  account  of  any  such  foreign  government 
and  to  receive  at  par  from  such  foreign  government  for  the 
amount  of  any  such-  advances  its  obligations  hereafter  issued 
bearing  such  rate  or  rates  of  interest,  not  less  than  5  per 
centum  per  annum,  maturing  at  such  date  or  dates,  not  later 
than  October  15,  1938,  and  containing  such  terms  and  condi- 
tions, as  the  Secretary  of  the  Treasury  may  from  time  to  time 
prescribe.  The  Secretary,  with  the  approval  of  the  President, 
is  hereby  authorized  to  enter  into  such  arrangements  from 
time  to  time  with  any  such  foreign  government  as  may  be 
necessary  or  desirable  for  establishing  such  credits  and  for 
the  payment  of  such  obligations  before  maturity. 

(b)  The  Secretary  of  the  Treasury  is  hereby  authorized 
from  time  to  time  to  convert  any  short  time  obligations  of 
foreign  governments  which  may  be  received  under  the 
authority  of  this  section  into  long  time  obligations  of  such 
foreign  governments,  respectively,  maturing  not  later  than 
October  15,  1938,  and  in  such  form  and  terms  as  the  Secretary 
of  the  Treasurj^  may  prescribe;  but  the  rate  or  rates  of 
interest  borne  by  any  such  long  time  obligations  at  the  time 
of  their  acquisition  shall  not  be  less  than  the  rate  borne  by 
the  short  time  obligations  so  converted  into  such  long  time 
obligations;  and,  under  such  terms  and  conditions  as  he  may 
from  time  to  time  prescribe,  to  receive  paj^ment,  on  or  before 
maturity,  of  any  obligations  of  such  foreign  governments 
acquired  on  behalf  of  the  United  States  under  authority  of 
this  section,  and,  with  the  approval  of  the  President,  to  sell 
any  of  such  obligations  (but  not  at  less  than  par  with  accnied 
interest  unless  otherwise  hereafter  provided  bj^  law),  and  to 
apply  the  proceeds  thereof,  and  any  payments  so  received 
from  foreign  governments  on   account   of  the   principal  of 

469 


WAR  COSTS  AND  THEIR  FINANCING 

such  obligations,  to  the  redemption  or  purchase,  at  not  more 
than  par  and  accnied  interest,  of  any  bonds  of  the  United 
States  issued  under  the  authority  of  the  First  Liberty  Bond 
Act  or  Second  Liberty  Bond  Act  as  amended  and  suj^ple- 
mented,  and  if  such  bonds  can  not  be  so  redeemed  or  pur- 
chased, the  Secretary  of  the  Treasury  shall  redeem  or  purchase 
any  other  outstanding  interest-bearing  obligations  of  the 
United  States  which  may  at  such  time  be  subject  to  redemption 
or  which  can  be  purchased  at  not  more  than  par  and  accrued 
interest. 

(c)  For  the  purposes  of  this  section  there  is  appropriated 
the  unexpended  balance  of  the  appropriations  made  by  sec- 
tion 2  of  the  First  Liberty  Bond  Act  and  by  section  2  of  the 
Second  Liberty  Bond  Act  as  amended  by  the  Third  Liberty 
Bond  Act  and  the  Fourth  Liberty  Bond  Act,  but  nothing  in 
this  section  shall  be  deemed  to  prohibit  the  use  of  such  unex- 
pended balance  of  any  part  thereof  for  the  purpose  of  section 
2  of  the  Second  Liberty  Bond  Act,  as  so  amended,  subject  to 
the  limitations  therein  contained. 

Sec.  8.  That  the  obligations  of  foreign  governments 
acquired  by  the  Secretary  of  the  Treasury  by  virtue  of  the 
provisions  of  the  First  Liberty  Bond  Act  and  the  Second 
Liberty  Bond  Act,  and  amendments  and  supplements  thereto, 
shall  mature  at  such  dates  as  shall  be  determined  by  the 
Secretary  of  the  Treasury:  Provided,  That  such  obligations 
acquired  by  virtue  of  the  provisions  of  the  First  Liberty 
Bond  Act,  or  through  the  conversion  of  short  time  obligations 
acquired  under  such  act,  shall  mature  not  later  than  June  15, 
1947,  and  all  other  such  obligations  of  foreign  governments 
shall  mature  not  later  than  October  15,  1938. 

Sec.  9.  That  the  War  Finance  Corporation  Act  is  hereby 
amended  by  adding  to  Title  I  thereof  of  a  new  section,  to 
read  as  follows: 

"  Sec.  21.  (a)  That  the  corporation  shall  be  empowered 
and  authorized,  in  order  to  promote  commerce  with  foreign 
nations  through  the  extension  of  credits,  to  make  advances 
upon  such  terms,  not  inconsistent  with  the  provisions  of  this 
section,  as  it  may  prescribe,  for  i:)eriods  not  exceeding  five 
years  from  the  respective  date  of  such  advances: 

"(1)  To  any  person,  firm,  corporation,  or  association 
engaged  in  the  business  in  the  United  States  of  exporting 

470 


LIBERTY  BOND  ACTS 

therefrom  domestic  products  to  foreign  countries,  if  such 
person,  firm,  corjioration,  or  association  is,  in  tlic  opinion  of 
the  board  of  directors  of  the  corporation,  unable  to  obtain 
funds  upon  reasonable  terms  through  banking  channels.  Any 
such  advance  shall  be  made  only  for  the  purpose  of  assisting 
in  the  exportation  of  such  products,  and  shall  be  limited 
in  amount  to  not  more  than  the  contract  price  therefor, 
including  insurance  and  carrying  or  transportation  chaises 
to  the  foreign  point  of  destination  if  and  to  the  extent 
that  such  insurance  cariying  or  transportation  charges  are 
payable  in  the  United  States  by  such  exporter  to  domestic 
insurers  and  carriers.  The  rate  of  interest  charged  on  any 
advance  shall  not  be  less  than  1  per  centum  per  annum  in 
excess  of  the  rate  of  discount  for  ninety-day  commercial 
paper  prevailing  at  the  time  of  such  advance  at  the  Federal 
reserve  bank  of  the  district  in  which  the  borrower  is  located 
and 

"(2)  To  any  bank,  banker,  or  trust  company  in  the  United 
States  which  after  this  section  takes  effect  makes  an  advance 
to  any  such  jjerson,  firm,  corporation,  or  association  for  the 
purpose  of  assisting  in  the  exportation  of  such  products.  Any 
such  advance  shall  not  exceed  the  amount  remaining  unpaid 
of  the  advances  made  by  such  bank,  banker,  or  trust  company 
to  such  person,  firm,  corporation,  or  association  for  such 
purpose. 

"(b)  The  aggregate  of  the  advances  made  by  the  corpo- 
ration under  this  section  remaining  unpaid  shall  never  at  any 
time  exceed  the  sum  of  $1,000,000,000. 

"(c)  Notwithstanding  the  limitation  of  section  1  the  ad- 
vances provided  for  by  this  section  may  be  made  until  the 
expiration  of  one  year  after  the  tennination  of  the  war 
between  the  United  States  and  the  German  Government  as 
fixed  by  proclamation  of  the  President.  Any  such  advances 
made  by  the  eori:)oration  shall  be  made  ui")on  the  promissory 
note  or  notes  of  the  borrower,  with  full  and  adequate  security 
in  each  instance  by  indorsement,  guaranty,  or  otherwise.  The 
corporation  shall  retain  power  to  require  additional  security 
at  any  time.  The  corporation  in  its  discretion  may  upon 
like  security  extend  the  time  of  payments  of  any  such  advance 
through  renewals,  the  substitution  of  new  obligations,  or 
otherwise,  but  the  time  for  the  payment  of  any  such  advance 

471 


WAR  COSTS  AND  THEIR  FINANCING 

sliall  not  be  extended  beyond  five  years  from  the  date  on 
which  it  was  originally  made." 

Sec.  10.  That  section  15  of  the  War  Finance  Corporation 
Act  is  hereby  amended  to  read  as  follows : 

"  Sec.  15.  That  all  net  earnings  of  the  corjioration  not 
required  for  its  operations  shall  be  accumulated  as  a  reserve 
fund  until  such  time  as  the  eorjioration  liquidates  under 
the  terms  of  this  title.  Such  reserve  fund  shall,  upon  the 
direction  of  the  board  of  dii'eetors,  with  the  ai^proval  of 
the  Secretary  of  the  Treasury,  be  invested  in  bonds  and 
obligations  of  the  United  States,  issued  or  converted  after 
September  24,  1917,  or  upon  like  directions  and  approval 
may  be  deposited  in  member  banks  of  the  Federal  Reserve 
System,  or  in  any  of  the  Federal  Reserve  Banks,  or  be  used 
from  time  to  time,  as  well  as  any  other  funds  of  the  corpo- 
ration, in  the  purchase  or  rcdemi^tion  of  any  bonds  issued 
by  the  corporation.  The  Federal  Reserve  Banks  are  hereby 
authorized  to  act  as  depositaries  for  and  as  fiscal  agents  of 
the  corporation  in  the  general  performance  of  the  powers 
conferred  by  this  title.  Beginning  twelve  months  after  the 
termination  of  the  war,  the  date  of  such  termination  to  be 
fixed  by  a  proclamation  of  the  President  of  the  United  States, 
the  directors  of  the  corporation  shall  proceed  to  liquidate  its 
assets  and  to  wind  up  its  affairs,  but  the  directors  of  the 
corporation,  in  their  discretion,  may,  from  time  to  time, 
prior  to  such  date,  sell  and  dispose  of  any  securities  or 
other  property  acquired  by  the  corporation.  Any  balance 
remaining  after  the  payment  of  all  its  debts  shall  be  paid 
into  the  Treasury  of  the  United  States  as  miscellaneous 
receii^ts,  and  thereupon  the  corporation  shall  be  dissolved." 

Sec.  11.  That  the  short  title  of  this  act  shall  be  "  Victory 
Liberty  Loan   Act." 

Approved  March  3,  1919. 


APPENDIX  V 

taxation  in  the  united  states 

Income  Taxation 

A  general  review  of  the  increase  in  the  number  of 
returns  and  income  reported  for  the  years  since  the 
inception  of  the  present  epoch  of  income  taxation  is 
given  in  the  following  comparative  tables : 


Net  Income  from  Personal  Returns,  Calendar  Years 
1913-1917 


Year 

Numl^er  of 
returns 

Net  income 

Increase  from 
year  to  year 

1913 

'357,598 
■357,515 
■336,652 
■437,036 

'3,472,890 

=$3,900,000,000 

=4,000,000,000 

=4,600,000,000 

6,300,000,000 

13,700,000,000 

1914 

1915 

1916 

1917 

$100,000,000 

600,000,000 

1,700,000,000 

7,400.000,000 

1  Returns  reporting  net  incomes  of  $3,000  and  over. 

2  Determined  on  the  Isasis  of  the  number  of  returns  filed  and  the 
average  net  income  in  each  class. 

s  Returns  reporting  net  incomes  of  $1,000  and  over. 

Income  Tax  Yield  from  Personal  Returns,  Calendar  Years 
1913-1917 


Year 


1913  > 
1914- 

1915  ■ 

1916  = 

1917  3 


Normal  tax 


$12,728,038 
16,559,493 
23,995,777 
51,440,558 

140,653,937 


Surtax 


$15,525,497 

24,486,669 

43,947,818 

121,946,136 

433,345,732 


War  excess- 
profits  tax 


$101,249,781 


Total  tax 


$28,253,535 

41,046,162 

67,943,595 

173,386,694 

675,249,450 


1  Annual  reports  of  the  Commi.ssioncr  of  Internal  Revenue  for  the 
fiscal  years  ended  June  30  immediately  following  the  years  shoAvn 
above.     Net  incomes,  $3,000  and  over. 

=  Statistics  of  income,  compiled  from  the  returns  filed  for  1916. 
Net  incomes,  $3,000  and  over. 

3  Net  incomes,  $2,000  and  over. 

473 


WAR  COSTS  AND  THEIR  FINANCING 

Number  of  Personal  Returns,  Calendar  Years  1914-1917,  by 
Income  Classes  ' 


Income  Classes 

1914 

1915 

1916 

1917 

$1,000  to  S2,000 

1,640,758 

$2,000  to  $2,500 

480,486 

$2,500  to  $3,000 

358,221 

$3,000  to  $4,000 

82,754 

69,045 

85,i22 

374,958 

$4,000  to  $5,000 

66,525 

58,949 

72,027 

185,805 

$5,000  to  $10,000 

127,448 

120,402 

150 , 553 

270,666 

$10,000  to  $15,000 

34,141 

34,102 

45,309 

65,800 

$15,000  to  $20,000 

15,790 

16,475 

22,618 

29,896 

$20,000  to  $25,000 

8,672 

9,707 

12,953 

16,806 

$25,000  to  $30,000 

5,483 

6,196 

8,055 

10,571 

$30,000  to  $40,000 

6,008 

7,005 

10,038 

12,733 

$40,000  to  $50,000 

3,185 

4,100 

5,611 

7,087 

$50,000  to  $100,000 

5,161 

6,M7 

10,452 

12,439 

$100,000  to  $150,000.... 

1,189 

1,793 

2,900 

3,302 

$150,000  to  $200,000..  .  . 

403 

724 

1,234 

1,302 

$200,000  to  $250,000.... 

233 

386 

726 

703 

$250,000  to  $300,000..  .  . 

130 

216 

427 

342 

$300,000  to  $400,000..  .  . 

147 

254 

439 

380 

$400,000  to  $500,000.... 

69 

122 

245 

179 

$500,000  to  $1,000,000.  . 

114 

209 

376 

315 

$1,000,000  and  over 

60 

120 

206 

141 

Married  women  making 

returns  separate  from 

husbands 

(=) 

(.) 

=  7,635 

(2) 

Total  number  of  re- 

turns filed 

357,515 

336,652 

437,036 

3.472,890 

1  The  returns  for  1913  are  omitted,  as  they  pertain  only  to  the  last 
10  months  of  that  year. 

2  The  net  incomes  reported  on  separate  returns  made  by  husband 
and  wife  in  1916  are  combined  and  included  as  one  retmn  in  the 
figures  for  the  several  classes.  In  1914,  1915,  and  1917  the  returns 
of  married  women  filed  separately  are  included  in  their  individual 
income  classes  independently  of  husband's  income. 


TAXATION  IN  THE  UNITED  STATES 


Income  Tax  Rates 
ACT  OF  1913 


Income 


Normal 


$4,000  and  over .  . 
$20,000-S50,000.. 
$50,000-175,000.  . 
$75,000-1100,000. 
$100,000-1250,000 
$250,000-1500,000 
$500,000  and  over 


Surtax 


Total 


ACT  OF  1916 


Income 


$4,000  and  over 

$20,000-$40,000 

$40,00(>-$60,000 

$60,000-$80,000 

$80,000-$  100,000.... 
$100,000-150,000. . . . 
$150,000-$200,000... 
$200,000-$250,000... 
$250,000-$300,000. . . 
$300,000-$500,000.  . . 
$500,000-$l,000,000.. 
$1,000,000-$1,500,000 
$l,500,000-$2,000,000 
$2,000,000  and  over.. 


Normal 

Surtax 

2 

2 

i 

2 

2 

2 

3 

2 

4 

2 

5 

2 

6 

2 

7 

2 

8 

2 

9 

2 

10 

2 

11 

2 

12 

2 

13 

Total 


2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 


WAR  COSTS  AND  THEIR  FINANCING 


Income  Tax  Rates- 
act  OF  1917 


-Continued 


Normal 

Addi- 

Sm-tax 

Addi- 

Income 

(Act  of 

tional 

(Act  of 

tional 

Total 

1916) 

normal 

1916) 

surtax 

$2,000  and  over 

2 

2 

$4,000  and  over 

2 

2 

4 

$5,000-$7,500 

2 

2 

i 

5 

$7,500-$  10,000 

2 

2 

2 

6 

$10,000-$  12,500 

2 

2 

3 

7 

$12,500-$  15,000 

2 

2 

4 

8 

$15,000-$20,000 

2 

2 

5 

9 

$20,000-$40,000 

2 

2 

i 

7 

12 

$40,000-$60,000 

2 

2 

2 

10 

16 

$()0,000-$SO,000 

2 

2 

3 

14 

21 

$80,000-$  100,000 

2 

2 

4 

18 

26 

$100,000-$150,000 

2 

2 

5 

22 

31 

$150,000-$200,000 

2 

2 

6 

25 

35 

$200,000-S250,000 

2 

2 

7 

30 

41 

$250,000-$300,000 

2 

2 

8 

34 

46 

$300,000-$500,000 

2 

2 

9 

37 

50 

$500,000-$750,000 

2 

2 

10 

40 

54 

$750, 000-$  1.000,000... 

2 

2 

10 

45 

59 

$1,000,000-$1, 500,000. . 

2 

2 

11 

50 

65 

$l,500,00O-$2,000,000. . 

2 

2 

12 

50 

66 

$2,000,000  and  over .  .  . 

2 

2 

13 

50 

67 

ACT  OF  1919 


Income 

Normal 
(1918) 

Normal 

(1919 

and 

after) 

Surtax 

Total 
(1918) 

Total 

(1919 

and 

after) 

$2,00O-$5,000 

$5,000-$6,000 

$6,00(>-$8,000 

$8,000-$  10,000 

$10,000-$  12,000 

$12,000-$  14,000 

$14,000-$  16,000 

$16,000-$18,000 

$18,000-$20,000 

$20,000-$22,000 

6 
6 
12 
12 
12 
12 
12 
12 
12 
12 

4 
4 

8 
8 
8 
8 
8 
8 
8 
8 

..... 

2 
3 
4 
5 
6 
7 
8 
9 

6 
7 
14 
15 
16 
17 
18 
19 
20 
21 

4 
5 
10 
11 
12 
13 
14 
15 
16 
17 

476 


TAXATION  IN  THE  UNITED  STATES 


ACT  OF  1910 — Continued 


Income 


$22,000-$24,000 

$24,000-$26,000 

$26,000-$28,000 

$28,000-$30,000 

$30,000-.$32,000 

$32,000-.|34,000 

$34,000-$36,000 

$36,000-$3S,000 

$38,000-$40,000 

$40,000-|;42,000 

$42,000-$44,000 

S44,000-$46,000 

$46,000-$48,000 

$48,000-i$50,000 

$50,000-«52,000 

$52,000-$54,000 

$54,000-$56,000 

$56,000-$58,000 

$5S,000-$60,000 

$60,000-$62,000 

$62,000-164,000 

$64,000-$66,000 

$66.000-$68,000 

$68,000-S70,000 

$70,000-$72,000 

$72,000-$74,000 

S74,000-$76,000 

$76,000-$78,000 

$7S,000-$80,000 

$80,000-,$82,000 

$82,000-184,000 

$84,000-.|86,000 

$86,000-$8S,000 

$88,000-190,000 

$90,00O-.l;92,O00. . .  . 
$92,000-194,000. . .  . 
$94,000-$96,000. . .  . 
$96,000-$98,000. . .  . 
$9S,000-$100,000... 
$100, 000-$  150, 000.  . 
$150,000-$200,000.  . 
$200,000-$300,000. . 
$300,000-$500,000. . 
$500,000-11,000,000 
$1,000,000  and  over. 


Normal 

Total 

Normal 

(1919 

Surtax 

Total 

(1919 

(1918) 

and 
after) 

(1918) 

and 
after) 

12 

8 

10 

22 

18 

12 

8 

11 

23 

19 

12 

8 

12 

24 

20 

12 

8 

13 

25 

21 

12 

8 

14 

20 

22 

12 

8 

15 

27 

23 

12 

8 

16 

28 

24. 

12 

8 

17 

29 

25 

12 

8 

18 

30 

26 

12 

8 

19 

31 

27 

12 

8 

20 

32 

28 

12 

8 

21 

33 

29 

12 

8 

22 

34 

30 

12 

8 

23 

35 

31 

12 

8 

24 

36 

32 

12 

8 

25 

37 

33 

12 

8 

26 

38 

34 

12 

8 

27 

39 

35 

12 

8 

28 

40 

36 

12 

8 

29 

41 

37 

12 

8 

30 

42 

38 

12 

8 

31 

43 

39 

12 

8 

32 

44 

40 

12 

8 

33 

45 

41 

12 

8 

34 

46 

42 

12 

8 

35 

47 

43 

12 

8 

36 

48 

44 

12 

8 

37 

49 

45 

12 

8 

38 

50 

46 

12 

8 

39 

51 

47 

12 

8 

40 

52 

48 

12 

8 

41 

53 

49 

12 

8 

42 

54 

50 

12 

8 

43 

55 

51 

12 

8 

44 

56 

52 

12 

8 

45 

57 

53 

12 

-  8 

46 

58 

54 

12 

8 

47 

59 

55 

12 

8 

48 

60 

56 

12 

8 

52 

64 

60 

12 

8 

56 

68 

64 

12 

8 

60 

72 

68 

12 

8 

03 

75 

71 

12 

8 

64 

76 

72 

12 

8 

65 

77 

73 

477 


WAR  COSTS  AND  THEIR  FINANCING 

Estate  Taxes  Levied  in  the  United  States,  1916-1919 


Net  Estate 

Act  of 
1916 

Act  of 
March 
3,  1917 

Act  of 
October 
3,  1917 

Act  of 
1919 

Not  exceeding  $50,000 

$50,000-1150,000 

1 

2 

3 

4 

5 

5 

6 

6 

7 

8 

9 

10 

10 

10 

1.5 

3 

4.5 

6 

7.5 

7.5 

9 

9 

10.5 
12 

13.5 
15 
15 
15 

2 

4 

6 

8 

10 

10 

12 

12 

14 

16 

18 

20 

22 

25 

1 
2 

$150,000-$250,000 

3 

$250,000-$450,000 

4 

$450,000-$750,000 

6 

$750,000-$  1,000,000 

$1,000,000-11,500,000 

$1,500,000-$2,000,000 

$2,000,000-$3,000,000 

$3,000,000-$4,000,000 

$4,000,000-$5,000,000 

$5,000,00{>-$8,000,000 

$8,000,000-$10,000,000 

In  excess  of  $10,000,000 

8 
10 
12 
14 
16 
18 
20 
22 
25 

TAXATION  IN  THE  UNITED  STATES 


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I 


APPENDIX  VI 

PUBLIC   DEBT   OF    THE    UNITED    STATES 

The  following  is  a  summary  of  the  public  debt  of  the 
United  States  Government  as  it  stood  on  June  30,  1919 ; 

Summary  of  the  Public  Debt,  June  30,  1919 

GROSS  debt 

Debt  bearing  no  interest $236,428,774.09 

Debt  on  which  interest  has  ceased II,  109 , 370 . 26 

Interest-bearmg  debt 25 ,  234 ,  496 ,  273 .  54 

Gross  debt $25,482,034,418.49 

NET  DEBT 

Gross  debt $25,482,034,418  .49 

Deduct — 

Balance  free  of  current  obligations 1 ,  002 ,  732 ,  042  .  00 

Net  debt $24,479,302,376.49 


In  the  following  table  are  given  the  details  as  to  the 
interest-bearing  debt  as  it  stood  on  June  30,  1919 : 


WAR  COSTS  AND  THEIR  FINANCING 


INTEREST-BEARINQ  DE 


I 


Title  of  loan 


Consols  of  1930. 
Loan  of  1925.... 


Panama  Canal  loan  of  1 
1910-1930.  j 

Panama  Canal  loan  of  1 
1918-193S.  / 

Panama  Canal  loan  of  1 

1901.  _  J 

Conversion  bonds 

Certificates  of  indebt-  1 
ecliiess  (various).        i 

Certificates  of  indebt-  1 
edness.  I 

First  Liberty  loan .  .  . 


First     Liberty     loan  | 
converted.  I 


Do. 


First     Liberty     loan  \ 
second  converted,      j 

Second  Liberty  loan  . 


Second    Liberty  loan,  1 
converted.  J 

Third  Liberty  loan. . . 

Fourth  Liberty  loan 

Victory  Liberty  loan .  1 


War-savings  and 
thrift  stamps,  series 
1918-19. 


Postal  savings  bonds  \ 
(first  to  sixteenth  J 
series) . 


Aggregate     of     in-.  , 
terest-bearing  debt 


Rate, 
per  tent 


.do... 

3 
..do.. 

^'ariou6 

2 

3j 


When 
issued 


41 


do. 


4i 

.. .do... 
...do... 

3  J  and  4  j 
43 

22 


1900 
1895-96 

1906 

1908 

1911 

1916-17 

1918-19 

1918-19 
1917 

1917 

1918 

1918 

1917 

1918 

1918 
1918 

1  1919 
( 

\  1917- 
/  1919 


1911- 
1919 


When  redeemable  or 
payable 


Payable  after  Apr.    1, 

1930. 

Payable  after  Feb.   1, 

1925. 
Redeemable  after  Aug. 

1,  1916. 
Payable  Aug.  1,  1936. 
Redeemable  after  Nov. 

1,  1918. 
Payable  Nov.  1,  1938. 
Payable  June  1,  1961. 

Payable  30  years  from 

date  ofissue. 
Various,    not    exceed- 
ing 1  year  from  date 
ofissue. 
1    year  from   date   of 
issue. 

Redeemable      on 

{     after  .June   15,    1932. 

Payable  June  15,  1947 

Redeemable  on  or  after 

June  15,  1932. 

Payable  June  15,  1947 

f  Redeemable  on  or  after 

\    June  1.5,  1932. 

Payable  June  15,  1947 
(  Redeemable  on  or  after 
\  June  15,  1932. 
I  Payable  June  15,1947. 
I  Redeemable  on  or  after 
\  Nov.  15,  1927. 
i  Payable  Nov.  15, 1942. 

(  Redeemable  on  or  after 
\     Nov.  15,  1927. 
[  Payable  Nov.  15, 1942. 
Payable  Sept.  15,1928. 

I  Redeemable  on  or  after 
Oct.  15,  1933. 
Payable  Oct.  15,  1938. 
Redeemable  June  15, 
i  or  Dec.  15,  1922. 
I  Payable  May  20,  1923. 
(  Pavable  Jan.  1,  1923, 
1    and  Jan.  1,  1924. 

f  Redeemable     after     1 
year    from    date    of 
<    issue. 

Payable  20  years  from 
I    date  ofissue. 


Interest 
payable 

Jan.,  Apr., 
July,  Oct. 

Feb.,  May, 
Aug.,  Nov 

.        do 


do 

\  Mar.,  June, 

j    Sept.,Dec. 

Jan.,   Apr., 

July,  Oct. 
At  maturity 

or  earlier. 

Jan.,  July. 
June,  Dec. 

....do.... 

June,  Dec. 

...  .do. . . . 

}  May,  Nov. 

J 

May,  Nov. 
Mar., Sept. 
[  Apr.,Oct. 

I  June,  Dec. 

I 

\    At 

J      maturity* 

}  Jan.,  July 


1  This  amount  represents  receipts  of  the  lYeasurer  of  the  United  States  on  ac- 
count of  principal  of  bonds  of  the  Fourth  Liberty  loan  to  June  30. 

This  amount  represents  receipts  of  the  Treasurer  of  the  I'nited  States  on  ac- 
count of  principal  of  notes  <>i  tlie  Aictory  Liberty  b  an  to  June  30 

^The  average  issue  price  of  war-savings  stamjs  for  the  years  1918  and  1919 
with  interest  at  four  per  cent  per  annum  compounded  quarterly  for  the  average 

490 


PUBLIC  DEBT  OF  THE  UNITED  STATES 
June  30,  1919 


Amount  issued 


$646,250, 
162,315, 


150,00 
400.00 


54,631,980.00 


30,000, 
50,000, 

28,894, 

4,719,582, 

178,723, 

1,989,455, 

568,318, 

405,443, 

3,492, 

3,807,864, 


000.00 
.000.00 

.500.00 
,490.00 
000.00 

550.00 

450.00 

,150.00 

,050.00 

,200.00 


$3,034,609,850.00 
4,175,148,700.00 
16,959.504,587.00 

23,467,844,971.77 
«1, 091, 017, 006. 20 

11,349,960.00 


OrXSTANDING  JUNE  30,  1919 


Registered 


$598,031,100.00 
105,036,250.00 

48,948,080.00 

25,835,520.00 
43,389,600.00 

6,705,000.00 


178,723,000.00 

288,862,500.00 

21,062,950.00 

86,588,100.00 

1,112,700.00 

85,942,950.00 

$444,421,350.00 
530,720,350.00 


10,676,000.00 


Coupon 


$1,692,950.00 
13,453,650.00 

6,100.00 

111,880.00 
6,610,400.00 

22,189,500.00 
3,446,260,490.00 


1,121,209,100.00 

146,729,800.00 

316,852,000.00 

2,379,350.00 

618,261,400.00 

52,417,830,900.00 
3,427,832,350.00 


.953,997,434.77 


673,960.00 


Total 


$599,724,050.00 
118,489,900.00 

48,954,180.00 

25,947,400.00 
50,000,000.00 

28,894,500.00 

3,446,260,490.00 

178,723,000.00 

1,410,071,600.00 

107,792,750.00 

403,440,100.00 

3,492,050.00 

704,204,350.00 

$2,862,252,250.00 
3,958,552,700.00 
6,794,504,587.00 

3,467,844,971.77 
953,997,434.77 

11,349,960.00 


$31,384,445,994.97  $25,234,496,273.64 


reriod  to  maturity  will  amount  to  $5  on  Jan.  1,  1923,  and  Jan.  1,  1924,  respectively. 
Thrift  stamps  do  not  bear  interest. 

^This  amount  represents  receipts  of  the  Treasurer  of  the  United  States  on  ac- 
count of  proceeds  of  sale  of  war-savings  certificate  stamps  and  United  titatss  thrift 
stamps. 

491 


INDEX 


Acceptances,  in  Great  Britain, 
30,  108;  in  United  States, 
136,  139. 

Adams,  Henry  Carter,  7,  234, 
312,  315,  373,  391. 

Adjustments  from  peace  to  war, 
of  the  various  belligerents, 
49-51;  obstacles  to,  51-53. 

Admissions  and  dues,  taxes  on, 
in  United  States,  481. 

Advances  to  Allies.  See  Loans, 
foreign. 

Africa,  foreign  investments  in, 
16,  17;  total  war  expenditures 
by,  105. 

Aldrich-Vreeland  notes,  58, 

American  Bankers '  Association, 
210. 

American  Economic  Associa- 
tion, Committee  on  War  Fi- 
nance of,  219,  281,  356,  382. 

American  Expeditionary  Force, 
327. 

American  Foreign  Securities 
Company,  68-69,  75,  171. 

American  Geographical  and 
Statistical  Society,  308. 

Amsterdam,  displaced  by  Lon- 
don as  commercial  center,  18 ; 
exeliange  in,  125. 

Angell,  Norman,  17. 

Anglo-French  loan,  66,  68,  162, 
170,  396. 

Annuities,  386. 

Antwerp,  sacking  of,  18;  stock 
exchange  of,  closed,  28. 

Argentina,  a  borrowing  nation, 
12;  foreign  trade  of,  in  1913, 
15;  British  investments  in, 
16;  loans  to,  by  United 
States,  65,  67;  bonds  of,  as 
collateral,  69 ;  exchange  ar- 
rangements between  United 
States  and,  142;  gold  reserve 


in,  353 ;  note  issues  in,  353 ; 
bank  deposits  in,  355. 

Armistice,  224,  225,  286. 

Australia,  a  borrowing  country, 
12;  British  investments  in, 
16;  total  Avar  expenditures 
by,  105;  direct  issue  of  notes 
by,  130 ;  straight-term  bonds 
in,  149;  bonds  issued  at  par, 
152,  386;  numl)er  of  sub- 
scribers to  loans  in,  157;  war 
loans  in,  184;  imports  from, 
into  United  States,  331,  386. 

Austin,  Oscar  Phelps,  354, 

Austria,  expenditures  of,  104; 
lowest  denomination  of  bonds 
in,  156;  number  of  subscrib- 
ers to  loans  in, 157;  loans  by, 
1914-1018,  196;  revenues  of, 
1915-1918,  263;  capital  levy 
in,  380. 

Austria-Hungary,  manufactures 
in,  3  ;  German  investments  in, 
17 ;  financial  condition  of,  in 
1914,  26;  ultimatum  of,  to 
Serbia,  27;  declaration  of 
war  by,  28 ;  effect  upon,  of 
declaration  of  war,  33,  50; 
moratorium  in,  37;  loss  of 
gold  by,  42 ;  increase  of  note 
issues  in,  47;  expenditures  by, 
102-104;  national  pre-war  in- 
come of,  106;  condition  of 
Bank  in,  1913-1917,  123;  in- 
flation in,  125;  assistance  to, 
by  Bank,  126-128,  148;  rate 
of  interest  unchanged  by, 
151  ;  pre-war  credit  of,  151  ; 
lowest  denomination  of  bonds 
in,  156;  loans  by,  194-195; 
war  taxation  in,  262-263; 
budgets.  1915-1918,  318; 
gold  reserves  and  note  issues, 
352;  distrust  of  paper  money 


493 


INDEX 


in,  366;  pre-war  population, 
370;  wealth,  370;  income, 
370;  total  debt,  370;  in- 
terest charge,  371;  capital 
levy  in,  379. 
Austro-Hungarian  Bank,  Im- 
perial, gold  reserves  of,  40, 
42,  123-124,  128,  352,  364; 
note  issues  of,  48,  123 ;  run 
on,  122;  condition  of,  1913- 
1917,  123;  deposits  in,  123, 
124;  loans  by,  126-128, 

Bailey,  W.  W.,  270. 

Balkans,  German  investments 
in,  17. 

Bank  of  Amsterdam,  founding 
of,  6;  gold  reserves  of,  353; 
note  issues  of,  353. 

Rank  of  Algeria,  175. 

Bank  of  England,  establish- 
ment of,  6;  head  of  credit 
system,  29 ;  services  of,  upon 
outbreak  of  war,  31,  35,  108- 
110;  suspension  of  Bank  Act, 
39 ;  gold  reserves  of,  40,  352, 
363  ;  advances  to  Government, 
160,  162,  166;  note  issues  of, 
352;   deposits  in,  355. 

Bank  of  Finland,  gold  reserve 
of,  352 ;  note  issues  of,  352 ; 
resumption  of  specie  pay- 
ments by,  unlikely,  364. 

Bank  of  France,  establishment 
of,  6;  discount  of  pre-mora- 
torium  bills  of  exchange,  37, 
111;  gold  reserves  of,  40,  41, 
352,  363;  note  issues  of,  45, 
112,  352;  advances  to  the 
state,  112,  168,  169,  171,  172, 
389,  396;  deposits  in,  355; 
resumption  of  specie  pay- 
ments by,  unlikely,  364. 

Bank,  Imperial,  of  Germany, 
gold  reserves  of,  23,  40,  352, 
363;  note  issues  of,  23,  117, 
119-122,  352;  loans  of,  upon 
outbreak  of  war,  38,  118;  run 
on,  120;  advances  to  govern- 


ment, 187;  tax  on,  260;  de- 
posits in,  355 ;  resumption  of 
specie  payments  by,  unlikely, 
364. 

Bank  of  Hamburg,  6. 

Bank  of  Italy,  note  issues  of, 
115,  352;  advances  to  the 
government  by,  183;  gold  re- 
serves of,  352,  363 ;  deposits 
in,  355 ;  resumption  of  specie 
payments  by,  unlikely,  364. 

Bank  of  Naples,  14. 

Bank  of  Ottawa,  shipment  of 
gold  to,  from  IJnited  States, 
49 ;  for  Bank  of  England,  57. 

Bank  of  Rumania,  gold  reserves 
of,  364. 

Bank  of  Sicily,  114. 

Bank  of  Sweden,  founding  of, 
6 ;  gold  reserves  of,  353 ; 
note  issues  of,  353 ;  deposits 
in,  355. 

Bank,  Imperial,  of  Eussia, 
gold  reserves  of,  26,  40,  41, 
114,  352,  363;  note  issues  of, 
46,  113,  352;  advances  to 
government  by,  113,  176,  177; 
resumption  of  specie  pay- 
ments by,  unlikely,  364. 

Bank  of  Turkey.  See  Imperial 
Ottoman  Bank. 

Bank  of  Venice,  6. 

Bank  deposits,  in  leading  coun- 
tries, 1913  and  1918,  355;  in 
United  States,  1913-1918, 
357;  reduction  of,  unlikely, 
362. 

Bank  notes,  usual  conditions  of 
issue,  351 ;  issued  by  bel- 
ligerents, 1914  and  1918,  352; 
by  neutrals,  353 ;  contraction 
of,  will  be  slow,  362 ;  begun 
in  some  countries,  365 ; 
limited  circulation  of,  in  Eu- 
rope, 366-367. 

Banking,  functions  of  commer- 
cial, 5;  deposit,  6;  modern 
development    of,    6;    in 


494 


INDEX 


Florence,  6 ;  problem  of,  dur- 
ing war,  107,  351. 

Bayley,  N.  A.,  304. 

Beer.     See  Liquor,  malt. 

Belgium,  manufactures  in,  3 ; 
a  leading  country,  12 ;  for- 
eign trade  of,  in  1913,  15; 
foreign  investments  of,  17; 
entered  by  German  troops, 
28;  moratorium  in,  37;  total 
war  expenditures  by,  105; 
financial  policy  of  war,  183 ; 
unable  to  pay  war  expendi- 
tures out  of  tax  revenue, 
316;  acceptance  credit 
granted  to,  3-41 ;  investment- 
trusts  in,  343. 

Berlin,  stock  exchange  in, 
closed.  28;  panic  in,  33. 

Bimetallism,  145. 

Blaine,  James  G.,  303. 

Block,  Maurice,  83. 

Bogart,  Ernest  L.,  103,  105, 
106,  219,  250,  265,  293,  298, 
325,  399,  417. 

Bohemia,  366. 

Bolivia,  loans  to,  in  United 
States,  67  ;  exchange  arrange- 
ments with,  142. 

Bolles,  A.  S.,  298,  299,  300,  304. 

Bolshevik  regime  in  Eussia,  181, 
253,  379. 

Bans  de  la  defense  nationale, 
in  France,  168,  171,  172,  174. 

Bond-purchase  fund,  in  United 
States,  218-220.  227,  389. 

Bonds,  serial,  386 ;  straight- 
term,  387;  optional  or  re- 
deemable, 387;  gold,  388. 
See  also  Loans,  internal. 

Bordeaux,  municipal  bonds  of, 
sold  in  United  States,  70. 

Bourse,  founding  of,  in  Paris, 
6. 

Boy  Scouts,  216. 

Brazil,  British  investments  in, 
16. 

British  Dominions,  war  expendi- 
tures   by,    105;    war    bonds 


made  taxable,  153;  loan 
policy  of,  183  ;  issued  straight- 
term  bonds.  387. 

Brussels,  stock  exchange  in, 
closed,  28. 

Budget,  effect  of  war  upon,  in 
Great  Britain,  89-90;  in 
France,  93-94;  in  Russia,  97, 
254  ;  in  Germany,  99  ;  in  Au- 
stria-Hungary, 103 ;  first  war, 
in  Great  Britain,  236;  second, 
237;  third,  238;  fourth,  241; 
fifth,  243;  in  Germany.  259; 
summary  of  war,  of  leading 
belligerents,  317-318;  since 
the  armistice,  369;  of  1920 
in  Great  Britain,  394;  of 
1921,  395;  of  1920  in  France, 
396;  of  1920  in  Germany, 
402,  404. 

Budapest,  stock  exchange  in, 
closed,  28;  prices  in,  125. 

Bulgaria,  German  investments 
in,  17;  moratorium  in,  37; 
total  war  expenditures  by, 
105;  war  loans  in.  195;  war 
costs  of,  defrayed  largely  by 
Germany,  198;  unable  to  pay 
war  expenditures  out  of  tax 
revenues,  316. 

Bullock,  Charles  J.,  314. 

Business  as  usual,  prevented 
speedy  adjustment  to  war 
organization,  52-53,  214; 
taxes  on,  in  France,  249; 
future  of,  409. 

Canada  a  borrowing  country, 
12;  British  investments  in, 
14;  foreign  trade  of,  in 
1913,  15;  loans  to,  by  United 
States,  65,  67;  bonds  of,  as 
collateral,  69;  total  war  ex- 
penditures by,  105;  direct 
issue  of  notes  by,  129;  limita- 
tion on  amount  of  loans  in, 
147;  straight-term  bonds  in, 
149;  issue  of  bonds  at  par, 
152,    386;    lowest    denomina- 


495 


INDEX 


tlon  of  bond  in,  156;  war 
loans    in,     184;     government 

.  support  of  price  of  bonds, 
220 ;  bank  deposits  in,  355 ; 
made  bonds  payable  in  gold, 
388. 

Capital,  growth  of,  25;  demand 
for,  7 ;  annual  increase  of,  in 
United  States,  77,  377;  need 
of,  78 ;  for  reconstruction  in 
Europe,  334-335 ;  sources  of 
available,  336;  an  available 
surplus  in  the  United  States, 
337 ;  how  to  be  loaned  to  Eu- 
rope, 338 ;  investment  by 
Americans  in  Germany,  345. 

Capital  Issues  Committee,  of 
Federal  Reserve  Board,  137, 
217.  225. 

Capital  levy,  proposed  in  Great 
Britain,  379;  in  France,  380; 
in  Italy,  380,  400;  in  Switz- 
erland, 380;  in  Czecho-Slo- 
vakia,  380;  in  Austria,  380; 
in  Hunfrary,  380 ;  in  Ger- 
many, 381,  403;  definition  of, 
381;  arguments  for,  382. 

Certificates  of  indebtedness,  of 
foreign  governments,  206, 
207.  230.  See  also  Treasury 
bills ;  Treasury  certificates  of 
indebtedness. 

Ceylon,  British  investments  in, 
16. 

Chamber  of  Commerce  of  New 
York,  308. 

Chamberlain,  Austen,  166,  400. 

Chase,  Salmon  P.,  297,  298,  302, 
303,  304,  305,  306,  307,  308, 
309,  310,  311,  312,  313,  314, 
316. 

Chicago,  centralization  of  bank- 
ing in,  134 ;  credit  insurance 
in,  342. 

Child  labor,  tax  on,  in  United 
States,  295,  488. 

Chile,  a  borrowing  country, 
12;  bonds  of,  as  collateral, 
69. 


China,  a  borrowing  country,  12; 
foreign  trade  of,  in  1913,  15; 
loans  to,  by  United  States, 
65,  68. 

Civil  War  in  United  States, 
financing  of,  297-315. 

Coal,  government  monopoly  of, 
in  Italy,  258 ;  taxation  of,  in 
Germany,  260. 

Collier,  James  W.,  269. 

Commerce.    See  Trade,  foreign. 

Constitutional  budgetary  pro- 
cedure, breakdown  of,  in 
Great  Britain,  89-90;  in 
France,  93;  in  Germany,  101  ; 
in  Austria-Hungary.  103. 

Consumption   taxes,  410. 

Contraction,  the  remedy  for  in- 
flation, 354,  361. 

Cooke,  Jay,  311. 

Corporations,  development  of, 
2;  income  tax  on,  267.  271, 
276,  288;  excise  tax  on,  275; 
tax  in  Germany,  404. 

Cost  of  World  War,  1,  105;  of 
nineteenth  century  wars,  85 ; 
of  World  War  to  United 
States,  87-88;  to  Great  Brit- 
ain, 90;  to  France,  90;  to 
Eussia,  98;  to  Italy,  98;  to 
Germany,  100-101;  to  Au- 
stria-Hungary, 103,  104;  to 
all  belligerents,  105;  of  war, 
character  of,  413-420;  who 
pays,  413;  not  altered  by 
bond  issues,  414;  extent  to 
which  borne  by  future  gen- 
erations, 415;  indirect,  to  all 
belligerents,  417. 

Cotton  pool  in  United  States, 
57 ;  buy  a  bale  campaign,  58. 

Crammond,  Edgar,  52,  85. 

Credit,  conditions  for  the  de- 
velopment of  national,  1 ;  of 
international,  10;  organiza- 
tion of,  in  Great  Britain,  29; 
breakdown  of,  as  result  of 
war,  34,  55 ;  machinery  for 
financing  foreign   trade,   80; 


496 


INDEX 


use  of,  instruments  in  Ger- 
many, 120;  needed  by  Eu- 
rope during  period  of  recon- 
struction, 340 ;  acceptance,  to 
Belgium,  341;  industrial, 
341 ;  guaranteed  by  govern- 
ments, 342 ;  granted  by  group 
export  corporations,  342,  348; 
insurance,  342 ;  interchange, 
system  of  National  Associa- 
tion of  Credit  Men,  343; 
long  term,  343 ;  secured  by 
first  lien  on  government  reve- 
nues, 347;  short  term,  348. 

Creditor  nation,  the  I'nited 
States,  a,  76,  200.  330,  348. 

Crisp,  Charles  E.,  270. 

Cuba,  loans  to,  in  United  States, 
67. 

Culbertson,  "W.  S.,  11. 

Currency  and  Bank  Note  Act 
of  August  6,  1914,  in  Great 
Britain,  43-44,  128. 

Customs  duties,  in  Great  Brit- 
ain, 239,  242,  244;  in  Eussia, 
250;  in  Italy,  2;j7;  in  Ger- 
many, 262,  408;  in  United 
States,  269,  285,  295;  during 
Civil  War  302,  306;  future 
of,  411. 

Czeeho-Slovakia,  difficulty  of 
trade  in,  366;  capital  levy  in, 
380;  reduction  in  interest 
suggested  in,  383. 

Darleliensl'assen .  See  Loan  offi- 
ces. 

Davison,  Henry  P.,  341. 

Death  duties.  See  Inheritance 
tax. 

Debt,  public,  as  an  investment, 
3  ;  favoring  conditions  of,  7  ; 
groAvth  of,  8;  due  to  war, 
8-9;  floating,  in  Germany, 
101,  194,  378;  public,  in  Eus- 
sia, 178;  in  Italy.  182,  399; 
in  Germany,  193 ;  amount  of, 
of  the  European  belligerents, 
368-370;     payment     of,     un- 


likely, 372;  form  of,  372; 
theory  of  perpetual,  373 ;  as- 
sumed burdeulessness  of  do- 
mestic, 373;  provision  for 
payment  of,  in  United  States, 
375;  funding  the  floating, 
375;  of  United  States,  376; 
of  Great  Britain,  377 ;  of 
Italy,  378;  of  Germany,  378; 
of  Austria-Hungary,  379; 
form  of,  not  adapted  for  pay- 
ment, 385;  kinds  of,  386-388; 
willingness  of  belligerent  na- 
tions to  pay,  388;  ability  to 
pay,  389-390;  payment  of, 
not  a  loss,  416;  statement  of, 
in  United  States,  489-491. 

Deficit,  in  United  States,  393; 
in  Great  Britain,  394;  in 
France,  396;  in  Italy,  400;  in 
Germany,  402.  404. 

Deflation.     See  Contraction. 

Denmark,  353  ;  bonds  of,  as  col- 
lateral, 69;  gold  reserve  in, 
353;  note  issues  in.  353. 

Deposit  banking,  a  development 
of  nineteenth  century,  6 ;  in- 
creased during  war,  355. 

Deterioration  of  race  through 
war,  418. 

Dewey,  Davis  E.,  314. 

Direct  tax  of  1861  in  United 
States,  302,  307;  taxes,  277, 
407. 

Dix,  John  A.,  298. 

Dollar  exchange,  336. 

Door  and  window  tax,  in 
France,  249. 

Edge  Act,  344. 

Education  of  American  investor 

needed,  345-346. 
Egypt,  bonds  of,  as  collateral, 

69. 
Embargo  on  gold,  39,  41,  141, 

365. 
Erzberger,  Mathias,  402. 
Estate    tax.      See    Inheritance 

tax. 


497 


INDEX 


Excess-profits  tax  in  Great 
Britain,  239,  242,  243,  395, 
407,  409;  in  France,  246,  247, 
397,409;  in  Russia,  251,  252; 
in  Italy,  255,  256,  400,  409; 
in  Germany,  259,  260,  261, 
403;  in  United  States,  274, 
276,  280-282,  289-291,  407, 
409. 

Exchange,  bills  of,  usually 
drawn  on  London,  19,  80; 
mechanism  of  foreign,  in 
Great  Britain,  29;  movement 
of,  after  outbreak  of  ■war, 
48,  56,  64;  efforts  to  provide, 
in  Great  Britain,  109;  peg- 
ging of,  141,  142;  fall  of,  an 
obstacle  to  foreign  trade, 
336,  350;  effect  of  inflation 
on,  359. 

Exchequer  bonds  in  Great  Brit- 
ain, 160,  162,  165. 

Excise  duties,  in  Great  Britain, 
239,  242,  395;  in  United 
States,  268,  275,  284,  285, 
292;  during  Civil  War,  302, 
307,  308,  313;  in  France, 
397;  in  Germany,  408;  de- 
velopment of,  410;  rates  of, 
in  United  States,  479,  482. 

Exemption  from  taxation.  Lib- 
erty bonds,  208,  211-212,  215, 
222,  226-227,  279;  minimum 
of,  under  British  income  tax, 
238;  under  French  income 
tax,  248;  under  United  States 
income  tax,  266,   277,  279. 

Expenditures  for  World  War, 
82-106;  difficulties  in  esti- 
mating, 82;  predictions  as  to, 
83 ;  effect  on,  of  technical 
efficiency,  84 ;  by  United 
States,  86-89 ;  by  Great  Brit- 
ain, 89-93 ;  extravagance  of, 
92;  by  France,  93-97;  by 
Eussia,  97-98;  by  Italy,  98; 
by  Germany,  98-102 ;  by  Aus- 
tria-Hungary. 102-104;  by 
all    belligerents,    105;     com- 


pared with  national  incomes, 
106;  in  United  States  since 
the  armistice,  337,  392-393; 
extravagant  plans  for,  in  Eu- 
rope, 340;  growth  of,  prob- 
able, 374;  in  Great  Britain, 
393-395;  in  France,  396, 
397;  in  Italy,  399;  in  Ger- 
many, 402,  404;  comparison 
of,  for  five  nations,  405-407. 
Exports  from  United  States,  re- 
stricted to  non-belligerent 
countries,  326 ;  growth  of 
during  Avar,  327-329 ;  value 
of,  328;  destination,  328; 
future  of,  331;  by  group  ex- 
port corporations,  342;  for 
1919,  by  months,  349. 


Federal  Reserve  Act,  58,  80. 

Federal  reserve  banks,  135 ;  re- 
discounting  by,  135 ;  as  fiscal 
agents  of  the  government, 
138-139,  206;  preferential 
discounts  by,  138;  distributed 
Treasury  certificates  of  in- 
debtedness, 139,  203;  note 
issues  of,  139,  352;  gold  re- 
serves of,  139,  140,  352,  363; 
discounts  by,  139,  199;  mar- 
keted Liberty  loans,  206, 
209 ;  holdings  of  war  paper, 
213,  216-217,  224,  226;  de- 
posits in,  355.  See  also  Na- 
tional  banking  system. 

Federal  Reserve  Board,  70,  135, 
323 ;  capital  issues  committee 
of,  137,  217,  225;  preferen- 
tial discounts,  138;  division 
of  foreign  exchange,  142 ;  in- 
ternational gold  clearance 
fund,  144. 

Federal  Reserve  System,  132- 
140;  centralization  of  re- 
serves in,  135;  asset  currency, 
136;  gold  settlement  fund, 
136;  assistance  in  conduct  of 
war,  137. 


498 


INDEX 


Ferdinand,     Archduke    Franz, 
assassination  of,  24,  27. 

Fessenden,  W.  P.,  314. 

Fordney,  Joseph  W.,  88. 

Foreign  Finance  Corporation, 
345. 

Foreign  Trade  Corporation, 
342. 

Foreign  trade.  See  Trade,  for- 
eign. 

France,  value  of  manufac- 
tures in,  3  ;  value  of  property 
in,  5;  a  lending  nation,  12; 
foreign  trade  of,  in  1913,  15; 
foreign  investments  of,  16, 
18,  25,  399;  linancial  unpre- 
paredness  of,  25 ;  pre-war 
loan  of,  25 ;  breakdown  of 
credit  in,  31-32;  moratorium 
in,  36;  methods  to  protect 
gold  reserves,  41,  140;  in- 
crease in  note  issues  in,  45 ; 
effect  of  war  upon,  50 ;  loans 
to,  in  United  States,  1915- 
1917,  67;  mobilizes  Ameri- 
can securities,  74;  war  ex- 
penditures published  by,  82 ; 
suspension  of  constitutional 
methods  in,  93  ;  credits  voted 
in,  1914-1918.  94;  expendi- 
tures by,  1914-1918,  95; 
classification  of,  96 ;  national 
pre-war  income  of,  106;  utili- 
zation of  services  of  Bank  of 
France,  110-113,  148;  limita- 
tion on  amount  of  loan  in, 
147  ;  short-term  notes  in,  148  ; 
issue  of  perpetual  loans  by, 
149 ;  pre-war  credit  of,  151 ; 
bonds  issued  beloAV  par,  152 ; 
pre-war  debt  converted  by, 
153;  bond-purchase  fund  in, 
154 ;  loans  to  Allies  by,  155 ; 
lowest  denomination  of  bonds 
in,  156 ;  number  of  sub- 
scribers to  loans  in,  157 ; 
loans  by,  168-175;  in  1914, 
169;  in  1915,  170;  in  1916, 
172;   in   1917,  173;   in   1919, 


175;  war  taxation  of,  245- 
250;  revenues  of,  1914-1918, 
250;  budgets  of,  1914-1918, 
317;  financial  situation  in, 
369,  396,  405;  pre-war  popu- 
lation of,  370;  wealth,  370; 
income,  370;  total  debt,  370; 
interest  charge,  371;  floating 
debt  in,  377;  capital  levy  in, 
380;  taxes  in,  396-398,  406, 
408;  tobacco  monopoly  in, 
411;  moratorium  decrees  of, 
429-431. 

Frederick,  Leopold,  81. 

Frederick  the  Great,  22. 

Friday,  David,  77. 

Funding.     See  Debt. 

Gerard,  James  W.,  40. 

Germany,  value  of  manufac- 
tures in,  3 ;  a  lending  nation, 
12;  foreign  trade  of,  in  1913, 
15 ;  foreign  investments  of, 
16,  17;  ultimatum  of,  to 
France,  28 ;  financial  prepa- 
ration for  war,  33,  50;  avoids 
a  moratorium,  37;  measures 
in,  to  safeguard  gold  reserves, 
40;  exchange  of  gold  for 
notes  in,  41,  140;  currency 
measures  in,  47;  U)an  to,  in 
United  States,  67;  mobilizes 
foreign  securities,  75 ;  ex- 
penditures by,  1914-1918.  99, 
100;  votes  of  credit,  1914- 
1918,  100;  national  pre-war 
income  of,  106;  assistance  to, 
by  banks,  115-122;  note  cir- 
culation in,  1914-1918,  119; 
inflation  in,  120-122,  360; 
direct  issue  of  notes  by,  131; 
use  of  Treasury  bills  by,  148; 
issue  of  perpetual  loans  by, 
149;  date  of  issue,  150;  rate 
of  interest  unchanged  by, 
151 ;  pre-war  credit  of,  151  ; 
bond  purchases  by,  154 ;  loans 
to  Allies,  155;  lowest  denomi- 
nation  of   bonds,   156;    num- 


499 


INDEX 


ber  of  subscribers  to  loans, 
157;  loans  by,  183-194;  in 
1914-1918,  188,  194;  finan- 
cial policy  of,  234,  258;  war 
taxation  in,  259-262;  reve- 
nues of,  1915-1919,  262; 
budgets  of,  1915-1919,  318; 
financial  situation  in,  369, 
402-405;  pre-war  population, 
370;  wealth,  370;  income, 
370;  total  debt,  370,  378;  in- 
terest charge,  371;  floating 
debt  in,  378;  capital  levy  in, 
381;  reparations  by,  385; 
ta:xes  in,  402-404,  406,  408; 
act  providing  for  loan  offices 
in,  432-436. 

Glass,  Carter,  88,  392,  393. 

Gold,  withdrawal  of,  from 
banks  in  England,  31,  43;  in 
Germany,  33 ;  export  forbid- 
den in  France,  41 ;  in  United 
States,  49,  141,  142,  365;  in 
other  countries,  141,  365; 
hoarding  of,  in  England,  43  ; 
in  France,  46 ;  export  of, 
from  United  States,  49,  56, 
63,  142,  143,  365;  pool  in 
United  States,  57 ;  imports 
into  United  States,  64-65,  68, 
14],  143;  settlement  fund 
under  Federal  Eeserve  Sys- 
tem, 136;  international  clear- 
ance fund,  143 ;  fall  in  price 
of,  144-145;  production  of, 
145,  364;  statistics  of,  365. 

Gold  reserves,  methods  of  safe- 
guarding, 38;  in  principal 
central  banks,  39,  140 ; 
increased  by  exchange  of 
gold  for  bank  notes  by 
citizens,  in  Germany,  40- 
41;  in  France,  41,  363; 
in  Eussia,  41,  363;  of 
Reichsbank,  122,  363  ;  against 
currency  notes  in  Great  Brit- 
ain, 129;  against  Dominion 
notes  in  Canada,  129;  against 
Commonwealth  notes  in  Aus- 


tralia, 130;  in  United  States, 
139,  140,  363;  essential  for 
support  of  credit,  143 ;  of 
banks  during  Civil  War,  305  ; 
of  belligerents,  1914  and 
1918,  352,  354;  of  neutrals, 
353,  354;  of  leading  banks 
in  1919,  363. 
Great  Britain,  value  of  manu- 
factures in,  3 ;  value  of  prop- 
erty in,  5;  a  lending  nation, 
12;  foreign  investments  of, 
14,  16,  18,  24;  foreign  trade 
of,  in  1913,  15;  unprepared- 
ness  of,  for  war,  24 ;  declares 
war  on  Germany,  28 ;  break- 
down of  credit  in,  29-30,  50 ; 
moratorium  in,  35;  currency 
measures  in,  43 ;  borrowings 
by,  in  United  States,  1915- 
1917,  67;  mobilizes  American 
securities,  74 ;  war  expendi- 
tures published  by,  82;-  ap- 
propriation system  of,  89 ; 
expenditures  of,  1914-1919, 
90 ;  by  quarters,  91  ;  extrava- 
gance in,  92 ;  total  war  ex- 
penditures by,  105;  national 
pre-war  income  of,  106.  370; 
use  of  paper  money  and  bank 
credit  by,  108-110;  direct 
issue  of  notes  by,  128;  Treas- 
ury bills  in,  148;  continuous 
loan  in,  149;  pre-war  credit 
of,  151  ;  bonds  issued  at  par, 
152,  386 ;  pre-war  debt  con- 
verted, 153;  war  bonds  made 
taxable  in,  153 ;  bond  pur- 
chase fund  in,  154;  loans  to 
Allies  by,  155;  lowest  de- 
nomination of  bonds  in, 156; 
number  of  subscribers  to 
loans  in,  157;  loans  by,  159- 
167;  in  1915,  160;  in  1916, 
162;  in  1917,  163;  in  1918, 
165;  in  1919,  167;  tax 
policy  of,  234,  235;  war  taxes 
in,  235-245;  revenues  of, 
1914-1919,  245;   budgets  of, 


500 


INDEX 


1915-1919,  317;  proportion 
of  loans  and  taxes,  319; 
placed  embargo  on  gold  ex- 
ports, 365;  financial  situation 
in,  369,  394,  405;  pre-war 
population  of,  370;  wealth, 
370;  total  debt,  371;  interest 
charge,  371;  floating  debt  in, 
377;  capital  levy  in'^  379;  re- 
duction in  debt  of,  390;  taxes 
in,  395,  406,  407;  moratorium 
proclamations  in,  423-428. 

Greece,  French  loans  to,  25; 
total  war  expenditures  by, 
105. 

Guyot,  Ives,  16. 

Hart,  A.  B.,  305,  310. 

Havenstein,  Kudolph,  120,  193. 

Hay,  John,  299. 

HelflPerich,  Karl,  99,  183,  186, 
189,   191,   234,  258,  259. 

Hill,  Ebenezer  J.,  271. 

Hirst,  F.  W.,  85,  151. 

Hoarding  of  money,  in  Eng- 
land, 43 ;  in  France,  46 ;  in 
Germany,  47,  120;  in  Austria- 
Hungary,  48,  123. 

Hobson,  C.  K.,  14,  16. 

Holland,  a  lending  country,  12 
foreign  trade  of,  in  1913,  15 
bonds  of,  as  collateral,  69 
sale  of  foreign  securities  in 
75;  French  loans  in,  171 
gold  reserves  in,  353 ;  capital 
levy  in,  379. 

Hollander,  Jacob  H.,  205. 

Hoover,  Herbert  C,  on  needs  of 
Europe,  338-339. 

Howe,  Frederick  C,  313. 

Hull,  Cordell,  265. 

Hungary,  expenditures  of,  104; 
lowest  denomination  of  bonds, 
156 ;  number  of  subscribers 
to  loans,  157;  war  loans, 
1914-1918,  196;  revenues  of, 
1915-1918,  263;  capital  levj 
in,  380. 

Hyndman,  H.  M.,  26. 


Imperial  Ottoman  Bank,  de- 
cline of  gold  reserves  of,  42, 
3G4. 

Imports  into  United  States,  of 
non-essentials  curtailed,  326 ; 
growth  of,  during  war,  327, 
329-330;  sources,  329;  future 
of,  331,  332,  348;  for  1919, 
by  months,  349;  restrictions 
upon,  by  Europe,  350. 

Income,  national,  of  principal 
belligerents,  106,  370;  per 
capiia,  371. 

Income  tax,  in  Great  Britain, 
236,  237,  242,  395,  407;  in 
France,  246,  248,  250,  397, 
398,  408;  in  Russia,  252;  in 
Italy,  255,  257,  258,  400, 
408;  in  Germany,  261,  403, 
408 ;  in  Austria-Hungary, 
263;  in  IJnited  States,  264- 
267,  271-273,  277-280,  287- 
289,  407;  during  Civil  War, 
302;  statistics  of,  1913-1917, 
267,  473  ;  personal  returns  of, 
474;  rates  of,  act  of  1913, 
475;  act  of  1916,  475;  act  of 
1917,  476;   act  of  1919,  476. 

Indemnity  bonds,  German,  soon 
to  be  issued,  367;  probable 
transfer  of,  384;  amount 
fixed  by  Treaty  of  Peace, 
385;  payment  of,  397. 

Independent  Treasury  Act  of 
1846,  304. 

India,  a  borrowing  country,  12; 
foreign  trade  of,  in  1913,  15; 
British  investments  in,  16; 
total  war  expenditure  by, 
105;  exchange  arrangements 
between  United  States  and, 
142;  issue  of  bonds  at  par, 
152 ;  number  of  subscribers 
to  loans,  157 ;  war  loans  in, 
185;  imports  into  United 
States  from,  331. 

Inflation,  in  Germany,  120-122; 
in  Austria-Hungary,  124- 
126;  effect  on  trade  of,  126; 


501 


INDEX 


in  United  States,  139,  200, 
205,  323,  324;  during  Civil 
War,  313;  must  be  avoided 
in  extending  credit  to  Eu- 
rope, 347;  a  world  phenome- 
non, 351;  since  the  armistice, 
354,  355;  definition  of,  356; 
effects  of,  upon  prices,  356- 
358;  upon  ■wages,  356,  859; 
upon  foreign  exchange,  359; 
upon  solvency  of  banks,  359 ; 
why  permitted,  359 ;  aided 
flotation  of  loans,  360;  cur- 
tailed consumption  of  non- 
essentials, 360;  evil  effects  of, 
upon  the  Treasury,  361 ; 
social  cost  of,  361 ;  remedy 
for,  361;  effect  of  new  credits 
on,  367;   persistence  of,  368. 

Inheritance  tax,  in  Great  Brit- 
ain, 236,  407;  in  Germany, 
261,  403,  409;  in  Austria- 
Hungary,  262;  in  United 
States,  273-274,  276,  283,  291, 
407;  in  France,  397;  in  Italy, 
401 ;  use  in  post-war  finance. 
409;  rates  of,  in  United 
States,  478. 

Insurance,  rates  of  marine,  51  ; 
Bureau  of  War  Eisk,  in 
United  States,  58;  taxation 
of,  in  United  States,  481. 

Intelligence  of  peoples  in  prin- 
cipal countries,  391-392. 

Inter-Allied  Purchasing  Com- 
mission, 207,  232. 

Interest  charges  on  the  public 
debt,  of  leading  European 
belligerents,  369;  per  capita, 
371;  proposal  to  reduce,  383; 
on  Allied  debt  postponed  by 
United  States  Treasury  De- 
partment, 384;  of  French 
debt,  396;  German  debt,  402, 
404. 

International  Cotton  Corpo- 
ration, 342. 

International  High  Commis- 
siX)n,    144;    proposes   interna- 


tional gold  clearance  fund, 
144. 

Internationalism  of  trade,  20, 
27. 

Investment  in  undeveloped 
countries,  10-12;  as  a  cause 
of  war,  11,  12;  effected  by 
trade,  13,  15;  of  foreign  capi- 
tal in  United  States,  13; 
British,  abroad,  14-16,  24; 
of  French,  16-17,  25,  399;  of 
German,  16-17;  of  Belgian, 
17;  of  Dutch,  17;  of  Swiss, 
17;  widespread  character  of, 
17;  effect  on  international  al- 
liances of,  17-18;  slight,  by 
people  of  United  States  be- 
fore the  war,  65 ;  during  the 
war,  66-71,  346;  larger 
profits  from,  at  home,  81 ; 
permanent,  in  Europe  called 
for  by  present  situation,  343, 
346;  of  American  capital  in 
Germany,  345;  in  foreign  se- 
curities, 346. 

Investment-trust,  343. 

Italy,  value  of  manufactures  in, 
3 ;  German  investments  in, 
17;  refuses  to  make  war  in 
1913,  23;  moratorium  in,  37; 
loans  to,  in  United  States, 
1915-1917,  67;  war  expend- 
itures published  by,  82 ;  ex- 
penditures by,  98,  106;  na- 
tional pre-war  income  of, 
106  ;  note  circulation  in,  1913- 
1918,  115;  direct  issue  of 
notes  by,  131 ;  limitation  on 
amount  of  loan  in,  147;  ad- 
vances of  banks  to,  148;  is- 
sue of  perpetual  loans  by, 
149;  pre-war  credit  of,  151; 
lowest  denomination  of  bonds 
in,  156;  number  of  subscrib- 
ers to  loans  in,  157;  loans  in, 
181;  debt  in,  191 4-1 91 8,  182; 
loans,  1914-1918,  183;  war 
taxation  in,  254-258 ;  rev- 
enues   of,     1915-1919,    258; 


502 


INDEX 


budgets  of,  1915-1919,  318; 
financial  situation  in,  3G0, 
399-401;  pre-war  population 
of,  370;  wealth,  370;  income, 
370;  total  debt,  370;  interest 
charge,  371;  capital  levy  in, 
380;  taxes  in,  400,  406,  408. 

Japan,  a  borrowing  country, 
12;  foreign  trade  of,  in  1913, 
15;  loans  to,  in  United 
States,  68;  total  war  ex- 
penditures by,  105 ;  loans  to 
Allies  by,  155 ;  gold  reserves 
in,  352 ;  note  issues  in,  352 ; 
bank  deposits  in,  355. 

Jastrow,  J.,  381. 

Java,  imports  from,  331. 

Jennings.  II.  H.,  128. 

Jeze,  Gaston,  249. 

Johnson,  A.  S.,  111. 

Jordan,  David  Starr,  418. 

Jugo-Slavia,  difficulties  of  ex- 
change in,  367. 

Kahn,  Otto  H.,  211. 
Keating,  Edward,  270. 
Kellogg,  Vernon  L.,  418. 
Kemmerer,  Edwin  W.,  132. 
Kent,  F.  I.,  350. 
Kenyon,  William  S.,  384. 
Kerensky,  Alexander  P.,  253, 
Keynes,  John  INTavnard,  384. 
Kinley,  David,  311. 
Kitchin,  Claude,  202.  286. 
Klotz,  Louis,  380,  396. 

Laughlin,  J.  Laurence,  30,  47, 
429,  432. 

Law,  Andrew  Bonar,  243. 

League  of  Nations,  420. 

Leffingwell,  Eussell  C,  376. 

Lenin,  Nicholai,   253. 

Liberty  loans  in  United  States, 
199-233;  marketed  by  banks, 
138,  206;  policy  regarding, 
201-202;  characteristics  of, 
207;  first,  208-210;  second. 
210-214;       third,      214-220; 


fourth,  220-225;  fifth,  226- 
228;  Bond  Act,  first,  437- 
441;  second,  442-454;  sup- 
plement to,  454-457;  third, 
457-4G3 ;  fourth,  463-464 ; 
Victory  Loan  Act.  464-472. 

Lindsay,  Samuel  McC,  89. 

Liquor,  distilled,  taxation  of,  in 
Great  Britain,  240,  244,  395; 
in  France,  247,  397;  in  Rus- 
sia, 251;  in  Italy,  255.  258; 
in  Germany.  261  ;  in  United 
States,  284,  292,  294;  during 
Civil  War,  307;  future  of, 
410;  rates  of,  in  United 
States,  479,  486. 

Liquor,  malt,  taxation  of,  in 
Great  Britain,  237,  240,  244, 
395;  in  Eussia,  251;  in  Italy, 
255;  in  United  States,  284; 
in  France,  397;  future  of, 
410;  rates  of,  in  United 
States,  479,  486. 

Lloyd-George,  David,  19,  35, 
2*36,  237,  419. 

Loan  offices  in  Germany,  38, 
47,  116,  189;  act  providing 
for,  432-436. 

Loans,  internal,  of  World  War 
in  Europe,  146-198;  mag- 
nitude, 146;  limitation  of 
amount,  147;  term,  148.  372; 
maturing  and  perpetual 
bonds.  149;  period  of  sub- 
scription, 149;  date  of  issue, 
150;  rate  of  interest,  150; 
before  the  war,  151;  price  of 
issue,  152;  conversion  privi- 
leges, 153 ;  exemption  from 
taxation,  153 ;  collateral 
privileges,  153;  bond-pur- 
chase funds,  154 ;  internal  or 
foreign,  154  ;  methods  of  sub- 
scription and  payment,  155 ; 
low  denomination  of  bonds, 
156;  distribution  and  num- 
ber of  subscribers,  156-158; 
success,  158;  Avar  loans  in 
Great  Britain,  160-167;  first, 


503 


INDEX 


160;  second,  161;  third,  162- 
164;  day-to-day  borrowing, 
164-166;  fourth,  166;  war 
loans  in  France,  168-175; 
pre-war  loan,  168;  first,  170; 
second,  171;  third,  173; 
fourth,  174;  war  loans  in 
Eussia,  176-181;  first,  176; 
second,  177;  third,  177; 
fourth,  178;  fifth,  179;  sixth, 
179;  seventh,  180;  Liberty 
loan,  180;  war  loans  in  Italy, 
181-183 ;  mobilization  loan, 
181 ;  first  to  fourth,  183  ;  war 
loans  in  Canada,  184;  in 
Australia,  184;  in  New  Zea- 
land, 185;  in  India,  185;  war 
loans  in  Germany,  183,  186- 
194;  theory  of  war  finance  in, 
186,  190,  316;  first  loan,  187, 
189;  second  to  eighth,  188; 
sale  of  bonds  at  nearly  par, 
192;  ninth,  193;  war  loans  in 
Austria-Hungary,  194-197; 
in  Turkey,  195,  198;  in  Bul- 
garia, 195,  198;  in  United 
■States,  199-233;  during  Civil 
War,  299,  303,  309,  313; 
policy  of  financing  war  by, 
300,   307,  310,  312,   314. 

Loans,  foreign,  by  people  of 
United  States  during  the  war, 
66-71,  200;  based  on  eolbt- 
eral,  69,  75;  warning  of  Fed- 
eral Eeserve  Board  regard- 
ing, 70;  by  United  States 
Government,  to  Great  Britain, 
164;  to  France,  173,  174; 
to  Eussia,  180;  to  Italy,  182; 
to  Allies,  206,  208,  230-233, 
319,  333;  discontinued,  338; 
needed  by  Europe  for  recon- 
struction, 333-335; to  Europe 
should  be  from  private 
sources,  338;  rationing  of, 
339;  demand  for,  340;  pro- 
posal to  cancel  United  States, 
383. 

Loans,  proportion  between,  and 


taxes,  319-325;  advantages 
of  loans,  320;  objections  to 
heavy  taxation,  321;  desir- 
ability of  heavy  taxes,  322; 
evils  of  excessive  loans,  323- 
325. 

London,  founding  of  stock  ex- 
change in,  6;  closing  of,  28; 
as  a  world  center,  18-20,  29, 
55;  advantages  of,  80;  credit 
insurance  in,  342. 

Loree,  L.  F.,  73. 

Loria,  Achille,  380. 

Luxuries,  taxation  of,  in  Great 
Britain,  240,  241,  242,  244, 
410  ;  in  France,  250,  398,  410 ; 
in  Italy,  256,  401  ;  in  Ger- 
many, 261 ;  in  United  States, 
285,  293-294,  410,  483. 

Lyons,  municipal  bonds  of,  sold 
in  United  States,  70.      • 

McAdoo,  William  G.,  202. 
MeCulloch,  Hugh,  299,  300,  309, 

314. 
McKenna,    Eeginald,    161,    238, 

241,  242. 

Madrid,  stock  exchange  in, 
closed,  28. 

Manufactures,  value  of,  in 
jirincipal  countries,  3. 

Marseilles,  municipal  bonds  of, 
sold  in  United  States,  70. 

Mexico,  a  borrowing  country, 
12;  French  investments  in, 
17,  399;  loans  to,  in  United 
States,  67. 

Mill,  John  Stuart,  418. 

Miller,  Adolph  C,  323. 

Mitchell,  Wesley  C,  306. 

Mobilization,  of  securities  by 
British  Government,  74;  by 
French,  74;  by  German,  75; 
of  financial  resources  of  bel- 
ligerents,   158. 

Money,  issue  of,  at  outbreak  of 
war.  42 ;  paper  money  issued 
directly    by    British    govern- 


504 


INDEX 


ment,  43-45,  128;  by  cham- 
bers of  commerce  in  France, 
4(3;  paper,  and  bank  credit, 
107-145 ;  Dominion  notes  is- 
sued by  Canada,  129;  Com- 
monwealth notes  issued  by 
Australia,  130;  state  notes  in 
Italy,  131,183;  United  States 
notes  during  Civil  War,  308, 
309,  310,  311,  313,  314;  in 
circulation  in  United  States, 
1913-1918,  357;  fiduciary, 
now  in  circulation,  practically 
inconvertible,  358 ;  reduction 
in  total  amount  of,  unlikely, 
362;  a  beginning  made  in, 
365 ;  limited  circulation  of 
fiduciary,  due  to  distrust, 
366-367. 

Monopolies,  Government,  rev- 
enue from,  in  Great  Britain, 
240,  244;  in  France,  247, 
397;  in  Eussia,  251;  in  Italy, 
255,  257,  258;  in  Germany, 
259;   future  of,  411. 

Montreal,  stock  exchange  in, 
closed,  28. 

Moratorium,  definition  of,  34; 
in  Great  Britain,  35-36;  in 
France,  36 ;  in  Eussia,  37 ; 
in  other  countries,  37;  in 
Germany,  37-38,  118;  in 
Austria-Hungary,  122;  Brit- 
ish Proclamation  of,  August 
2,  1914,  423;  of  August  6, 
1914,  423;  of  August  12, 
1914,  425;  of  September  3, 
1914,  425;  of  September  30, 
1914,  426;  French  Mora- 
torium Decree,  of  August  9, 
1914,  429;  of  September  27, 
1914,  431. 

Morgan,  J.  P.,  and  Company, 
69,   70,   341. 

Morocco  episode,  21. 

Mulhall,  M.  G.,  3. 

Munitions  tax,  in  Great  Britain, 
243;  in  United  States  274, 
488. 


National  Association  of  Credit 
Men,  342. 

National  banking  system  in 
United  States,  132;  decen- 
tralization, 133 ;  inelasticity 
of  note  circulation,  133  ;  cum- 
bersome exchange  methods, 
134;  lack  of  correlation,  134; 
act  passed,  311.  Sec  also 
Federal  Eeserve  banks. 

Netherlands.     See  Holland. 

Newfoundland,  loans  to,  in 
United  States,  67. 

New  York,  founding  of  stock 
exchange  in,  6 ;  closing  of, 
28;  debt  owed  by,  in  1914, 
55;  as  a  world  financial 
center,  76;  conditions  to  be 
met,  77-81;  centralization  of 
banking  in,  134;  credit  in- 
surance in,  342. 

New  Zealand,  total  war  ex- 
penditures by,  105;  issue  of 
laonds  at  par,  152,  386;  num- 
ber of  subscribers  to  loans 
in,  157;  war  loans  in,  185. 

Nicholay,  John  G.,  299. 

Nitti,  S.,  399. 

Norway,  loans  to,  in  United 
States,  67 ;  bonds  of,  as  col- 
lateral, 69 ;  gold  reserve  in, 
353;  note  issues  in,  353. 

Noyes,  Alexander  Dana,  24, 
297. 

OhUcinHons  de  la  defense  na- 
tionale,  in  France,  169,  172, 
174. 

Owen,  Eobert  L.,  344. 

Paish,  Sir  George,  13,  14,  91 
384. 

Panama,  loans  to,  in  United 
States,  67. 

Panic,  of  July,  1914,  on  stock 
exchanges,  28-29;  in  Great 
Britain,  30-31  ;  in  France, 
31-32;  in  Germany,  33,  121; 


505 


INDEX 


in  United  States,  54;  in  Aus- 
tria-Hungary, 1918,  126. 

Paper  money.     See  Money. 

Paris,  founding  of  Bourse  in, 
6;  closing  of  Coulisse,  28; 
municipal  bonds  of,  sold  in 
United  States,  70. 

Peace  Treaty,  396,  404. 

Peru,  loans  to,  in  United 
States,  67 ;  exchange  arrange- 
ments with,  142. 

Pethick-Lawrcnce,   F.   W.,   382. 

Petrograd,  stock  exchange  in, 
closed,  28. 

Pigou,  A.  C,  321,  382. 

Plehn,  Carl  C,  8. 

Poland,  exchange  difficulties  in, 
366. 

Population,  of  leading  nations, 
370. 

Prices,  movement  of,  in  United 
States,  1913-1918,  357; 
causes  of  high,  357-358;  con- 
tinuance of,  368. 

Progressive  taxation,  409.  See 
also  Excess  profits  tax;  In- 
come tax;  Inheritance  tax. 

Prohibition  in  United  States, 
410. 

Public  utilities,  taxation  of,  in 
United  States,  481. 

Easin,  Dr.,  383. 

Reconstruction  of  Europe, 
amount  needed  for,  333-334; 
must  be  supplied  by  loans, 
335 ;  sources  from  ■which 
available,  336-337;  how  to 
be  made  available,  338;  must 
be  largely  by  own  efforts, 
340;  must  be  treated  as  a 
whole,  347. 

BeicMbanlc.  See  Bank,  Im- 
perial, of  Germany. 

Reparations,  385. 

Repudiation  of  debt  in  Russia, 
379;  in  Hungary,  379. 

Resources  of  leading  belliger- 
ents, 391-392. 


Revenue  act,  in  United  States, 
of  October  3,   1913,  264;   of 
October    22,    1914,    268;     of 
September  8,  1916,  269-275 
of  March   3,   1917,   275-276 
of  October  3,  1917,  277-285 
of   February   24,    1919,    286 
rates  of  all  acts,  479-488. 

Revenues,  of  leading  European 
belligerents,  369,  405;  of 
United  States,  392-393;  of 
Great  Britain,  394-395;  of 
France,  396,  397;  of  Ger- 
many, 402,  404. 

Ribot,  Alexandre  F.,  93,  249, 
380,  396,  398. 

Roedern,  Count  S.  F.  W.  E.  von, 
261. 

Rumania,  French  investments  in, 
17,  399 ;  German  investments 
in,  17;  total  war  expendi- 
tures by,  105;  financing  the 
war  in,  183. 

Russia,  value  of  manufactures 
in,  3 ;  foreign  trade  of,  in 
1913,  15;  French  investments 
in,  16,  18,  25,  399;  fiscal  con- 
dition in,  in  1914,  26;  cereal 
crops  of,  1910-1914,  26,  32; 
mobilization  by,  28 ;  effect  of 
outbreak  of  war  upon,  32-33, 
50;  moratorium  in,  37;  ex- 
change of  gold  for  notes  in, 
41,  140;  increase  of  note 
issues  in,  46;  loans  to.  in 
United  States,  1915-1917. 
67;  expenditures  by,  1914- 
1917,  97,  98;  national  pre- 
war income  of,  106,  370;  use 
of  Bank,  113-114,  148;  pre- 
war credit  of,  151 ;  lowest 
denomination  of  bonds  in, 
156;  number  of  subscribers 
to  loans  in,  157;  loans  in, 
176-181;  in  1914,  177;  in 
1915,  179;  in  1916,  180,  in 
1917,  181;  revolution  in,  180, 
252;  Bolshevik  regime,  181, 
253 ;    war   taxation   in,    250- 


506 


INDEX 


254;  revenues  of,  1914-1917, 
254;  budgets  of,  1914-1917, 
317;  financial  situation  in, 
369;  pre-war  population,  370  ; 
wealth,  370;  total  debt.  370; 
interest  charge,  370;  alcohol 
monopoly  in,  411. 

St.  Louis,  centralization  of 
banking  in,  134. 

Sales,  tax  on,  in  Germany,  259. 
See  also  Turnover,  tax  on. 

Santo  Domingo,  loans  to,  in 
United  States,  67. 

Samuels,  Herbert,  92. 

Savings  of  American  people. 
77-78,  337. 

Sehanzer,    Carlo,    380. 

Schiffer,  E.,  100,  101,  262,  402. 

Schuckers,  J.  W.,  299. 

Scotland,  investment-trusts  in, 
343. 

Securities,  market  for,  4; 
American,  held  abroad,  71, 
73;  resold  to  United  States, 
72-74;  mobilization  of,  by 
British  government,  74 ;  by 
French,  74;  by  German,  75. 

Seligman.  E.  R.  A.,  12,  84. 

Serbia,  French  investments  in, 
25 ;  ultimatum  to,  by  Austria- 
Hungary,  27;  war  declared 
against,  28;  total  war  ex- 
penditures by,  105;  financing 
the  war  in,  183. 

Sherman,  John,  299. 

Silver,  in  German  war  chest, 
23 ;  payment  of,  by  Eeichs- 
bank,  47 ;  exports  of,  from 
United  States,  142;  rise  in 
price  of,  145. 

Simmons,  F.  McL.,  265,  287. 

Sinking  fund,  of  Fifth  Libertv 
Bond  Act,  227,  375,  389;  in 
Great  Britain,  389. 

Sixteenth  Amendment  of  the 
Federal  Constitution,  264. 

Smith,  George  Otis,  22. 

South  America,  closing  of  stock 


exchanges  in,  28;  foreign 
trade  of  United  States  with, 
62. 

Soviet.     See   Bolshevik. 

Spain,  manufactures  in,  3; 
bonds  of,  as  collateral,  69; 
exchange  arrangements  be- 
tween United  States  and, 
142 ;  gold  reserve  in,  353 ; 
note  issues  in,  353;  bank  de- 
posits in,  355. 

Specie  payments  suspended,  in 
Austria-Hungary,  34,  48, 
122;  by  Bank  of  France,  39, 
46;  by  Eeichsbank,  39,  47; 
by  Bank  of  Russia,  39,  46, 
113;  by  Imperial  Austro- 
Hungarian  Bank,  39 ;  nomi- 
nally maintained  by  Bank  of 
England,  39,  140;  in  Aus- 
tralia, 130;  maintained  in 
United  States,  140;  suspended 
during  Civil  War,  306 ;  re- 
sumption of,  unlikely  in 
Europe,  362. 

Stamp  taxes  in  United  States, 
485. 

Stock  exchange,  modern  de- 
velopment of,  6;  establish- 
ment of,  in  London,  6;  in 
New  York,  6;  in  Paris,  6; 
panic  on,  in  1914,  27-29; 
closed  in  European  cities, 
28;  in  New  York,  28,  54. 

Straits  Settlements,  imports 
from,  331. 

Sugar,  taxation  of,  in  Great 
Britain,  239,  242;  in  Russia, 
251,  252;  in  Italy.  255.  258; 
in  United  States  during  Civil 
War,  302,  307;  in  France, 
397;  future,  in  United  States, 
410. 

Super-  and  surtax.  See  Income 
tax. 

Sweden,  bonds  of,  as  collateral, 
69. 

Switzerland,  a  lending  country, 
12;    foreign    investments    of. 


507 


INDEX 


17;  loans  to,  in  United 
States,  67;  bonds  of,  as  col- 
lateral, 69 ;  exchange  arrange- 
ments between  United  States 
and,  142;  gold  reserve  in, 
353 ;  note  issues  in,  353 ; 
bank  deposits  in,  355;  capital 
Ie\'y  in,  380;  salt  monopoly 
in,  411. 

Taxation,  in  Europe,  234- 
264;  in  Great  Britain,  235- 
245;  in  France,  245-250;  in 
Eussia,  250-254;  in  Italy, 
254-258;  in  Germany,  258- 
262 ;  in  Austria-Hungary, 
262-263;  in  United  States, 
264-296;  during  Civil  War, 
301 ;  objections  to  heavy, 
321 ;  desirability  of  heavy, 
322;  after-war  problems  of, 
391-412;  in  Great  Britain, 
395 ;  in  France,  397 ;  in  Italy, 
400-401;  in  Germany,  402- 
404 ;  probable  development 
of,  407-412;  direct,  407- 
409;  of  inheritances,  409; 
on  business,  409;  of  articles 
of  consumption,  410  ;  customs, 
411;  by  fiscal  monopolies, 
411.     See  also  Eevenue  acts. 

Tea,  taxation  of,  in  Great 
Britain,  236,  237,  239;  in 
France.  247;  in  Italy,  258; 
in  United  States  during  Civil 
War,  302,  307 ;  in  the  future, 
410. 

Thrift  stamps,  in  United  States, 
229.  See  also  War  savings 
certificates. 

Tobacco,  taxation  of,  in  Great 
Britain,  239,  243,  395;  in 
France,  247,  397;  in  Eussia, 
251 ;  in  Italy,  257 ;  in  United 
States,  268,  275,  291,  294; 
during  Civil  War,  307  ;  future 
of,  410;  rates  of,  in  United 
States,  480,  486-487. 


Toronto,     stock     exchange     in, 

closed,  28. 
Trade,  foreign,  of  principal 
lending  and  borrowing  coun- 
tries, 15;  of  United  States, 
59,  72;  effect  of  war  upon, 
60-62;  with  Europe.  60-61; 
with  South  America,  62-63 ; 
regulated  to  help  win  war, 
326-327;  with  Europe  deter- 
mined by  reconstruction 
needs,  336.  See  also  Ex- 
ports ;   Imports. 

Trade  balance  of  United  States, 
13,  61,  64,  71,  72,  330.  349; 
of  Great  Britain,  25;  of 
France,  25;  result  of  self- 
denial,  332;  will  be  paid  by 
larger  imports,  332. 

Treasury  bills,  in  Great  Britain, 
bought  by  the  banks,  110, 
159;  in  Eussia,  113-114;  use 
of,  in  World  War,  148;  emis- 
sions of,  in  Great  Britain, 
160;  in  France,  168,  170;  in 
Eussia,  176,  179;  in  Italy, 
181;  in  Germany,  187,  189, 
192.  See  also  Certificates  of 
indebtedness. 

Treasury  certificates  of  indebt- 
edness, of  United  States,  139, 
202-205,  208. 

Treasury  notes.  Imperial,  in 
Germany,  22,  23,  331-132; 
in  United  States  during  Civil 
War,  298,  299,  303.  304. 

Turkey,  foreign  trade  of,  in 
1913,  15;  French  investments 
in,  17,  18,  25,  399;  mora- 
torium in,  37;  loss  of  gold 
by,  42;  total  war  expendi- 
tures by,  105 ;  war  loans  in, 
195. 

Turnover,  tax  on,  in  France, 
249,  398. 


Ukraine,     exchange     difficulties 

in.  367. 
Underwood,  Oscar  W.,  265. 


508 


INDEX 


United  States,  value  of  manu- 
factures in,  3 ;  value  of  prop- 
erty in,  5 ;  a  borrowing  na- 
tion. 12;  foreign  investments 
in,  13;  foreign  trade  of,  in 
1913,  15;  exports  of  gold 
from,  49,  56,  143,  3G5;  as  a 
neutral,  54-81 ;  debts  owed 
by,  56 ;  expansion  of  foreign 
trade,  59-63,  327-334,  349; 
imports  of  gold  into,  63-65, 
68,  141,  143 ;  foreign  loans 
floated  in,  1915-1917,  65-71; 
annual  payments  owed  by, 
64,  71 ;  exports  and  imports, 
1910-1914,  72;  repurchase 
by,  of  American  securities, 
73 ;  financial  position  of,  in 
1916,  76 ;  new  securities  is- 
sued in,  1910-1916,  78 ;  as  a 
lender  of  capital,  76-81 ;  war 
expenditures  published  by, 
82 ;  monthly  expenditures  by, 
1917-1918,  86;  total,  1916- 
.  1919,  87 ;  total  war  expendi- 
tures by,  105;  national  bank- 
ing system  in,  132-134; 
establishment  of  Federal  Re- 
serve System,  135;  services 
to  Government  of,  136-140; 
as  fiscal  agents,  138-139;  in- 
flation in,  139-140,  200,  356- 
357,  361 ;  control  of  gold  ex- 
ports by,  141 ;  exports  of 
silver  from,  142;  largest  loan 
in,  147  ;  limitations  on  amount 
of  loans  in,  147;  use  of 
Treasury  bills  by,  148;  bonds 
issued  at  par,  152,  207,  386; 
war  bonds  made  taxable,  153  ; 
bond  purchase  fund  in,  154, 
218;  loans  to  Allies  by,  155, 
206,  230-233,  333;  lowest  de- 
nomination of  bonds  in,  156, 
207;  number  of  subscribers 
to  loans  in,  157;  loans  in, 
199-233 ;  war  finance  pro- 
gram, 201 ;  issue  of  certifi- 
cates of  indebtedness  by,  204; 


First  Liberty  Loan  of,  208- 
210;  Second,  210-213;  Third, 
214-219;  Fourth,  220-224; 
Fifth,  226-228;  sinking  fund 
of,  227,  389;  war  savings 
certificates,  228-230;  taxation 
in,  264-296 ;  income  tax,  264- 
267;  act  of  October  22,  1914, 
268;  of  September  8,  1916, 
269-275;  of  March  3,  1917, 
275;  of  October  3,  1917,  277- 
285;  of  February  24,  1919, 
286-296;  revenues  of,  1914- 
1919,  295;  proper  proportion 
of  loans  and  taxes  in,  319; 
exports  from,  1914-1919, 
328;  imports  into,  1914- 
1919,  329;  available  capital 
in,  337;  extension  of  credit 
to  Europe  by,  338-345;  edu- 
cation of  people  of,  in  foreign 
investments,  346 ;  financial 
situation  in,  369,  392,  405; 
pre-war  population,  370; 
wealth,  370;  income,  370; 
total  debt,  370;  interest 
charge,  371;  theory  of  debt 
payment  in,  372;  probable  in- 
crease of  expenditures,  374; 
floating  debt  in,  376;  sug- 
gestion to  cancel  debt  owed 
by  Allies,  383 ;  made  bonds 
payable  in  gold,  388;  reduc- 
tion in  debt  of,  389 ;  taxes  in, 
407,  410;  First  Liberty  Bond 
Act,  437-441;  Second,  442- 
454;  Supplement  to,  454- 
457;  Third,  457-463  ;  Fourth, 
463-464;  Fifth,  464-472;  in- 
come tax  statistics,  473,  474; 
rates  of,  475-478;  rates  of 
excise,  stamp,  and  special 
taxes',  1913-1919,  479-488; 
public  debt  of,  489-491. 

Vanderlip,  Frank  A.,  339,  343. 
Vienna,      stock      exchange      in, 

closed,    28;    prices    in,    125; 

panic  in,  126. 


509 


INDEX 


Votes  of  credit,  in  Great 
Britain,  90;  in  France,  93- 
94;   in  Germany,   100. 

Wages,  movement  of,  in  United 
States,  1913-1918,  357. 

War  chest  in  Germany,  22. 

War  excess  profits  tax.  See 
Excess  profits  tax. 

War  Finance  Corporation,  137, 
217,  227  ;  amount  of  loans  by, 
338;  suspended,  338;  pro- 
visions of  act  relating  to, 
470. 

War  savings  certificates,  in 
United  States,  228-230. 

Wealth,  of  leading  nations,  370  ; 
per  capita,  371;  redistribu- 
tion of,  by  taxation,  412. 

Wehrbeitrag,  22,  23. 


Wells,  David  A.,  309. 

Whisky.     See  Liquor,  distilled.' 

Wickersham,  George  W.,  384. 

Williams,  John  Sharp,  265. 

Willoughby,  Westel  W.,  89. 

Willoughby,     William    F.,    89. 
137. 

Wilson,  Woodrow,  286,  294. 

Wintermantel,  Werner,  345. 

Withers,  Hartley,  44. 

Wirth,  G.,  404. 

World  War,  cost  of,  1,  10£ 
belief  that  it  would  be  short, 
51-52,  238,  245;  expenditures 
for,  82-106;  wastefulness  of, 
84;  policy  of  financing,  315, 
319-325;  indirect  costs  of, 
417;  effect  on  racial  vitality, 
418;  indirect  benefits  from, 
419. 


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